China and Venezuela: Equity Oil and Political Risk

Publication: China Brief Volume: 13 Issue: 3

This Oil Probably Isn't Bound for China


Referring to the evolving political crisis in Venezuela, a Shanghai Academy of Social Science scholar, Zhang Jiazhe, recently remarked, if Hugo Chavez dies, “the diplomatic effect on China won’t be large because China-U.S. competition is in Asia not Latin America. Economically, China-Venezuela relations are based on oil and weapons sales” (Huanqiu Shibao, January 6). Back in 2006 Beijing University Professor Zha Daojiong, however, sounded a more skeptical note when he wrote “The search for overseas oil supplies has led Beijing to pursue close diplomatic ties with Iran, Sudan, Uzbekistan and Venezuela—all countries that pursue questionable domestic policies and…foreign policies” [1]. These two different Chinese foreign policy perspectives highlight an ongoing debate—and not only inside of China—about how Chinese state-owned enterprise (SOE) pursuit of global energy supplies was or was not leading China into unwanted and unhealthy foreign entanglements.

The logic of Chinese SOE energy investments in all these “questionable” countries is straightforward: China needs more energy than it can produce domestically and its SOEs are “going out” to help supply domestic demand. In Sudan and Iran, however, Chinese national oil companies’ (NOCs) investments exposed Beijing diplomatically to internationally controversial political regimes. Chinese state-to-state energy ties to such “pariah states”, including more recent examples in Libya and Burma, have mostly been based in the Middle East, Africa or closer to China in Central and Southeast Asia [2]. The geographic focus, however, has now for the first time shifted to China’s presence in the Western Hemisphere as Venezuelan president Hugo Chavez’ health crisis evolves into a broader political crisis not only for Venezuela but for his regional allies and potentially for China. Today, it is in Venezuela that another Chinese state firm, this time the China Development Bank (CDB) has led China into another potential foreign policy quagmire.

China’s ties to Venezuela highlight a crucial, but often overlooked issue: the questionable logic that Chinese NOC “equity oil” acquisitions in controversial but energy-rich countries are justified by energy security needs. Indeed, Venezuela’s evolving political crisis may further expose the flaws in China’s state-capitalist approach to energy security. This is because Chinese firms have used the justification of energy security to expand investments and financial ties to Venezuela, but a significant portion of the oil is not actually going to China. If Chinese equity oil from Venezuela or other controversial countries is acquired by Chinese state firms in the name of energy security but then resold on global markets for profit, this begs the question of whether Chinese SOEs are unnecessarily exposing China to excessive political risk.

China-Venezuela Oil Accounting: Where’s The Oil Flowing?

The conventional wisdom about the China-Venezuela relationship, propagated most forcefully by Chinese officials keen to emphasize their country’s non-political interests in Venezuela, is that it is based on oil. Simply put, China needs oil and Venezuela has it. The CDB’s point-man on Venezuela, Li Kegu, summed up the logic of relations when he said “We [China] have lots of capital and lack resources, they have lots of resources and lack capital, so it’s complementary” (Bloomberg, September 27, 2012). China is the second largest oil importer in the world (after the United States) and its oil demand growth is the fastest. Venezuela recently was declared to have the world’s largest petroleum reserves, surpassing Saudi Arabia (BP Statistical Review of World Energy, June 2012). Lauding the rapid development of China-Venezuela oil ties, the Chinese press recently reported that Chinese imports of Venezuelan oil may reach 1 million barrels per day (b/d) by 2015 from a starting point of only 59,000 b/d as recently as 2005 (China Daily, December 1, 2012). By all outward indications, then, Venezuela-China oil ties should be a straightforward example of China’s self-declared win-win, complementary trade and investment relations with Latin America.

Such an assessment, however, would be premature and misleading. Because while oil is certainly the key link in China-Venezuela ties and while the amount of oil that “China” receives from Venezuela has certainly expanded rapidly from a low starting point in the last decade plus, there are a number of puzzling results that emerge from a closer analysis of official Venezuelan and Chinese trade statistics [3]. The most important of these is that official PDVSA (Venezuela’s state oil company) export statistics are consistently higher than official Chinese import statistics. Table 1 below lays out these official statistics and the percentage that Venezuelan exports exceed Chinese imports in every year since 2006 (full 2012 statistics, however, have not yet been published).


Table 1: Venezuela to China Oil Exports (barrels per day equivalent)


PDVSA Exports to China

Chinese Imports from Venezuela





























AVG: 34%

Sources: Informe de Gestión Anual de Petróleos de Venezuela S.A. (PDVSA), 2006-2012; “Zhongguo shiyou he tianranqi jin chukou zhuangkuang fenxi [Analysis of Chinese Oil and Natural Gas Imports and Exports],” in Zhongguo shiyou jingji, March 2012. The standard accounting measure for oil is in thousands of barrels per day equivalent, but China measures imports in millions of metric tons. The industry standard of 20,000 b/d equivalent to 1 million metric tons was used for the conversion.



These figures indicate, in every year from 2006 through 2011 during the boom in Venezuela-China oil trade and investment ties, PDVSA has consistently claimed an average of around one third more oil exports to China than China has claimed in imports. As the figures also show, however, in some years (e.g. 2008 and 2009) China’s official import figures were well under half and even closer to only one fourth of Venezuela’s official export figures. Other recent studies also corroborate the higher percentage disparities, showing a gap of 55–70 percent in both 2010 and 2011 [4].

What is the explanation for this consistent disparity and why does it matter? Although neither the Venezuelan nor the Chinese authorities have commented on these discrepancies in their official oil accounting statistics, a number of explanations come to the fore. Key among them are geography and chemistry. On the former, Venezuela is far away from China as well as the majority of its international oil transport routes (most of which are in the Middle East and Africa). On the latter, Venezuela’s heavy-grade oil is not well-suited for Chinese refining capacity.

Tied to these fundamental challenges is what is already known about Chinese national oil companies (NOCs) and their use of global equity oil acquisitions. A wide range of reports from international oil organizations like the International Energy Agency (IEA) to policy think tanks to academic publications have all indicated that frequently the majority of Chinese NOC’s equity oil is actually resold on local or international markets [5]. For example, one 2007 study showed that in 2006 Chinese NOCs resold close to 70 percent of their overall global equity oil production [6].

Combining the general pattern of Chinese NOC reselling of their equity oil with the specific geographic and refining challenges China faces in Venezuela, a logical conclusion is that the accounting discrepancies in Table 1 can largely be explained by Chinese NOC’s reselling of their Venezuelan oil. Further, it is likely that such resale is happening much closer to Venezuela (and the United States) than to China [7]. Indeed, in a 2005 interview, the Chinese ambassador to Venezuela noted “the natural markets for Venezuelan oil are North and South America” (El Universal, August 28–29, 2005). Ultimately, then, a significant portion, sometimes the majority, of oil that “China” receives through the CDB-led loans-for-oil deals with Venezuela is most likely in fact resold by its NOCs, never physically arriving in China. Such oil resales (at least of oil products) may be standard behavior for other international oil companies, but for China’s state-owned firms it has political consequences.

China and Venezuela: The CDB and Risk Socialization

Why does it matter if Chinese NOCs are reselling a significant percentage of their Venezuelan (or other) equity oil on the international market? In Venezuela, the CDB-led multi-billion dollar financing and investment relationship with the Chavez government constitutes the CDB’s largest financial presence anywhere outside of China itself and is nominally based on China’s need for oil [8]. If some significant percentage of the oil acquired through the CDB deals does not go to China and in the process the CDB, Chinese NOCs and other Chinese firms involved with the CDB deals earn a profit, then the CDB effectively has exposed China’s diplomacy and image to the full extent of Venezuelan political and economic risk for its own corporate gain. Of course, the CDB and other Chinese state and non-state firms involved in Venezuela still could face economic losses themselves in the wake of Chavez’s demise, but this is perhaps less serious than the potential political consequences.

For all practical purposes, this essentially amounts to CDB’s socialization, or nationalization, of its own corporate risk. If the CDB were not a Chinese state-owned “policy bank” at the leading edge of its own financing and other Chinese SOE investment in Venezuela and were instead a private firm, it would not represent state-to-state ties in the way it currently does. Because the CDB, however, is one of China’s three state-owned policy banks, its actions—including purely economic ones like providing financing for Venezuelan oil deals and for other Chinese firms to invest in Venezuela—have political consequences for China itself.

Through the CDB, “China” has become the largest source of foreign financing for Chavez, who is by far the most controversial and polarizing leader in Latin America. The CDB’s massive build-up of loans-for-oil deals have thus been seen by many of those who both love and hate Chavez, inside and outside of Venezuela, as symbolizing official Chinese backing for Chavez [9]. For a Chinese government that has a policy of non-interference in other countries’ domestic politics and is particularly concerned not to ruffle U.S. feathers in its own “backyard”, even the perception of such political support for Chavez is problematic. Moreover, if much of the oil acquired through the CDB deals is simply being resold, China’s new leadership may want to ask itself whether this constitutes a sound economic or political foreign policy strategy in Venezuela.

China and Post-Chavez Venezuela: Managing the Hangover

Neither Chavez nor PDVSA have necessarily been easy partners for China and many former PDVSA officials and opposition figures have been critical of the loans-for-oil deals with China (Perspectiva, November 2, 2012; La Nacion, October 7, 2012). China has had to work to parry Chavez’s efforts to involve it more closely in his own ideological and anti-U.S. agenda. Whether inside or outside of Venezuela, Chavez has been the kind of polarizing leader who you are either for or against. So in the case of the CDB-led build-up of financing and investment in Chavez’s Venezuela, China’s actions have spoken louder than words. For better or for worse, Chavez has been Beijing’s man and in return China has continued to supply Chavez with scarce foreign financing and investment. With Chavez ill in Cuba, possibly never to return, Venezuela has entered into a constitutional and political crisis that may drag China in as well.

For well over a year concerns have been raised that if, in a post-Chavez scenario, the opposition were to come to power that it would seek to alter the loans-for-oil deals with China (“China’s Cautious Economic and Strategic Gamble in Venezuela”, China Brief, September 30, 2011). Ultimately, no one knows the answer to those concerns. The CDB may have secured long-term access to Venezuelan oil for China’s NOCs, or alternately the CDB and other Chinese firms may face loss-making revisions to current agreements [10]. What is clear is that the CDB’s decade plus of binging on state-to-state deals with the Chavez government has now exposed Beijing to a painful diplomatic hangover tied to Venezuela’s slow-motion crisis.

Whether at home or abroad, Chinese leaders hate nothing more than instability, but instability is what they face in their relations with Venezuela. As in Sudan and Iran before, an unwanted crisis may yet serve to focus Chinese leaders’ minds to help build a healthier and more stable Venezuela, but doing so will probably require a willingness to rethink the governance of China’s SOEs abroad. Since the vast majority of China’s imported oil continues to be supplied by basic long-term trade contracts and not through its equity oil acquisitions, the crisis in Venezuela may prove the perfect opportunity to move away from a pattern of Chinese equity oil ties to controversial governments. If a major portion of China’s equity oil is not going to China anyway, the new Chinese leadership should ask itself whether the diplomatic and image costs to China are worth the risks.


  1. Zha Daojiong, “China’s Energy Security: Domestic and International Issues,” Survival, Vol. 48, No. 1, Spring 2006, pp. 179–190.
  2. For more on the geopolitical implications of China’s energy ties to such “pariah” regimes, see Andrew B. Kennedy, “China’s New Energy-Security Debate,” Survival, Vol. 52, No. 3, June-July 2010, pp. 137–158 and Wojtek M. Wolfe and Brock F. Tessman, “China’s Global Equity Oil Investments: Economic and Geopolitical Influences,” Journal of Strategic Studies, Vol. 35, No. 2, April 2012, pp. 175–196.
  3. As a percentage of total global oil imports, Chinese customs figures show that Venezuela accounted for less than .5 percent as recently as 2004, up to 4.5 percent in 2011. See, Zhongguo shiyou jingji [China’s Oil Economy], March 2012.
  4. See, Kevin Tu, “Chinese Oil, An Evolving Strategy,” China Dialogue, April 24, 2012, for 2010, and Michael Forsythe and Henry Sanderson, China’s Superbank, Singapore: Bloomberg Press, 2013, for early portions of 2011.
  5. See, for example, Julie Jiang and Jonathan Sinton, “Overseas Investments by Chinese National Oil Companies,” International Energy Agency, February 2011; Mikkal Herberg, “China’s Energy Rise and the Future of U.S.-China Energy Relations”, New American Foundation, June 21, 2011; and John Lee, “China’s Geostrategic Search for Oil”, The Washington Quarterly, Vol. 35, No. 3, Summer 2012, pp. 75–92.
  6. Erica S. Downs, “The Fact and Fiction of Sino-African Energy Relations”, China Security, Vol. 3, No. 3, Summer 2007, pp. 42–68.
  7. Jiang, and Sinton, p. 18.
  8. See, Forsythe and Sanderson, China’s Superbank, pp. 123–146.
  9.  Vladimir Rouvinski, “China Through the Eyes of Latin American Media: 2001-2011”, Conference Paper presented at Javeriana University, “China and Latin America: Strategic Partners in a Multipolar World?” Bogotá, Colombia, September 3–4, 2012.
  10. The very limited Chinese academic analysis of “risk” related to Chinese investments in Venezuela focuses almost exclusively on financial or economic factors, not political risk. See, for example, Zhang Kang, “Weineiruila shiyou zoushi he wo guo de fengxian duice [Venezuelan Oil and China’s Risk Policies],” Zhongguo Nengyuan Wang, December 13, 2011, available online <>.