Chavez's Death Could Dim China's Venezuelan Energy Prospects

China, the world's second-biggest consumer of crude oil, is likely to delay deciding on new investments in Venezuela's energy industry to assess any change of political direction after President Hugo Chavez's death.

"The death of Chavez could lead to oil supply uncertainties from Venezuela and could jeopardize Venezuela's oil exports to China in the short term," Gordon Kwan, a Hong Kong-based analyst with Mirae Asset Securities Ltd., said today in an e-mail. His death in the long-term may affect investment in the industry by China, he said.

State-run China Development Bank Corp. has agreed to lend Venezuela $46.5 billion since 2008, representing half of the loans the country received in the period, according to a Jan. 13 report from Massachusetts-based Tufts University. About 95 percent of the debt is backed by sales contracts for crude, the report shows. Chavez, who transformed Venezuelan politics by channeling record oil revenue to the poor, died at 58 after a struggle with cancer, raising the risk of unrest and political infighting.

Yao Zhongmin, head of China Development Bank's supervisory board, said in Beijing today the Venezuelan loans carried risks, for which the bank has a contingency plan. He didn't give any details.

Shipments to China by Petroleos de Venezuela SA, the state producer known as PDVSA, are up nearly tenfold since 2006 to an average 518,000 barrels a day and will surpass 1 million barrels a day before the end of 2015, Venezuela's Oil Minister Rafael Ramirez said Sept. 25. The country sells China about 19 percent of its output, based on Ramirez's statement.

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"China's current investment in the country should be safe, especially as a large chunk of the investment was in the form of 'loans for oil'," said Laban Yu, a Hong Kong-based analyst at Jefferies Group Inc. "What's uncertain at the moment is whether a new government will maintain its anti-U.S. stance or shift to the opposite. A shift of political atmosphere could dim Chinese companies' investment perspective in the country very quickly."

Venezuela, South America's largest oil exporter, ranked as China's seventh-biggest supplier last year, with 15 million tons, posting the highest expansion among China's top 10 providers at 33 percent. Chavez led a government that kept many of the biggest western oil companies out of Venezuela, helping China secure supplies.

Since Chavez announced he had cancer in June 2011, investors have speculated that his departure could pave the way for the opposition to win power and introduce more market- friendly policies. Venezuela's dollar bonds returned 46 percent last year, the best of any emerging market after the Ivory Coast, according to JPMorgan Chase & Co.'s EMBI Global index.

Citic, CNPC
China's Citic Group, which is constructing residential homes in Venezuela with total contracts of as much as $3 billion, is assessing the impact of Chavez's death, Chairman Chang Zhenming said today.

China Development Bank money has gone toward joint projects with state-owned China National Petroleum Corp. in the Orinoco heavy oil belt.

Fu Chengyu, chairman of China Petrochemical Corp., the parent of China Petroleum & Chemical Corp. (600028) or Sinopec, said Chavez's death won't affect the company. Sinopec is Asia's biggest refiner.

"Long term, the political uncertainties will discourage further China oil M&As in Venezuela's Orinoco Delta, rich in heavy oils that are highly sought after by Sinopec's coastal refineries," said Mirae Asset Securities' Kwan. Chinese companies will wait until at least the end of elections, which must be held within 30 days of the president's death, before assessing investments, he said.

New Head
Venezuelan Vice President Nicolas Maduro, a former bus driver and union leader, will take over as interim president of the country while elections are organized, according to Foreign Minister Elias Jaua.

Russian and Indian companies are withholding planned investments in Venezuelan oilfields, according to eight oil company executives and consultants earlier this year, who declined to be identified because they weren't authorized to talk about the matter publicly.

"We'll have to wait for the new head of state to be named and look at the statements he makes about the country's future directions," T.K. Ananthkumar, finance director at Oil India Ltd. (OINL), said today in a phone interview. Oil India is a partner with five other companies in a field that's producing about 1,000 barrels a day of crude in Venezuela. "Hopefully, things will not turn for the worse," he said.

Reliance, Gazprom
India's Reliance Industries Ltd. (RIL) postponed by a few months an estimated $2 billion investment decision for four Venezuelan oilfields beyond a Jan. 31 deadline because it has not received geological data from PDVSA, a person directly involved in the deal said this year, asking not to be identified citing confidentiality terms.

OAO Rosneft (ROSN) agreed to spend $36 billion with PDVSA, which oversees the world's largest oil reserves, and fellow Russian partners on Orinoco projects in the last three years. It also agreed to lend Venezuela $6 billion together with state-run OAO Gazprom (GAZP) in 2011. While Russian energy projects will advance as long as Chavez's party remains in charge, they won't be supported by the opposition, a Gazprom Latin American manager, who asked not to be named citing company policy, said Jan. 12.

Oil output in the country declined 13 percent to 2.7 billion barrels per day in 2011 from 1999 when Chavez came to power, according to the BP Statistical Review of World Energy. PDVSA hasn't published any operational data beyond 2011.