The following interview with Tsinghua University Prof. Matt Ferchen [1] was carried out in Beijing, China, March 6, 2014 by Patrick Renz and Frauke Heidemann. The main focus of the interview was on the China-Venezuela-U.S. nexus, the impact of the production of unconventional fossil fuels, broader Chinese energy security and upcoming reform challenges. All footnotes are remarks by Patrick Renz and Frauke Heidemann, aimed at giving some additional background knowledge and especially giving the links to the cited documents so that the reader can follow up on these issues easily.

.

. China-Venezuela-U.S.

What role do you see the ongoing unrest in Venezuela playing for the Chinese assessment of their current and future investments in Venezuela?

Starting more than a year ago, after the election of 2013 in Venezuela and when Chavez went back to Cuba for medical care, a reassessment has been taking place in China. This was just around the time that the party transition in China happened. Those two things, the reemergence of Chavez’s cancer with him going back to Cuba for treatment and the change of leadership in China happened at the same time. [2] The slow meltdown happened as Chavez disappeared and no one knew about his health status and then he died about this time last year. That whole period created a sense of reevaluation on the Chinese side about what the commitment should be. A lot of questions came up even before the election about whether or not the opposition had a chance of winning and when they didn’t, it came up again when Chavez got sick and they didn’t know who would take over. The election itself ended up very close. People here decided to get a handle on what was going on. The problem is that even though their guy Maduro won – they would never admit that he is their guy but he is as he was Chavez’s guy – the country is descending into greater and greater political, social and economic chaos. [3] None of that is good for China, the country that values stability over everything, both domestically and abroad. There has been a bit of a pause after Maduro won last year but ever since then all signs indicate deepening crisis and that is creating an increasing sense that there is instability. Today it is difficult to make prognoses about what is happening, almost anything could happen. They are still in this stage of anxiety and no relief on the horizon.

We read some reports about a refinery being built in China for Venezuelan crude oil. [4] This would be quite a change for China-Venezuelan relations as China could actually import and refine Venezuelan crude. Do you have any take on how far they are with the refinery?

This is part of a project I am currently working on with Deborah Gordon and Wang Tao. [5] I have always been quite skeptical of whether this refinery actually will be built. They had the ceremony to inaugurate it and are said to be working on it and it is supposed to come online this year or next year. But while there is a lot of talk about how it is a done deal and how it is going to be built, as far as I know it is still not actually up and running. Part of my skepticism derives from the fact that PDVSA is a part in it and supposedly kicking in some of the financing. [6] PDVSA is in a deep crisis so I don’t see them being able to hold up their end of the bargain. Additionally, there is the issue of whether or not an amount even close to what Venezuela claims to be exporting and China claims to be importing is coming here. The capacity of the refinery is supposed to be 400’000 barrels per day (bpd), which would make it the third largest of all Venezuelan refineries. [7] The biggest one, refining close to 1 million bpd, is in Venezuela itself, and a similarly big one is in the U.S., refining about 700’000 bpd. The ambition and size of this is really big, it is on the other side of the world. I am therefore still skeptical. There are many ways in which the fundamentals might not line up and it might be a huge waste of money but this does in no way have to mean that it is not going to happen. There are technical issues involved with the quality of oil the refinery is supposed to refine. The issue of quality of oil gained momentum here in terms of climate change issues and a criticism that the big oil companies themselves are somewhat to blame for the air quality and other climate problems in China. Supposedly, this refinery was being built towards a specification. There is a scale up to 5 regarding refining capacities and it was supposed to be built up to level 4 but now apparently cities such as Beijing and others are supposed to be up to level 5. [8] The decision to refine 400’000 bpd of heavy oil comes at a difficult time. The refining is going to be an energy intensive project. It doesn’t line up. You have really low quality oil from the other side of the world that you are importing into a country that already has concerns about climate change while also being desperate for oil.

What would be the incentive for China to not import already refined products but more crude oil?

Deborah Gordon’s recent report says a lot about how China is transforming itself into a major player in terms of refining, not just for it but also for others. This is part of a major push with yet unclear political and economic reasoning behind it. Previously there were disincentives for refining here because of pricing controls by the government, which was in part the reason for the big oil companies reselling locally and not bringing the crude back. But now there appears to be a trend towards more refining domestically. It depends on the pricing of it all but to the extent that the oil companies feel that the refining process is going to bring them money – that dynamic has changed.

What role do you see the U.S. playing in China’s involvement in Venezuela?

That is my current research project: U.S.-China ties with Venezuelan oil. So the interesting development is that the general trend on the U.S. side is less and less use of Venezuelan oil, less and less imports. The new EIA report from February states that the amount of oil imports from Venezuela is the lowest it has been since 1985. [9] Assessing imports from Venezuela is a little tricky because Venezuela and the Caribbean get factored in together – but the EIA has a chart showing a 20% peak around 1995 and it is now around 10%. The trend is thereby clear, the U.S. is moving away from Venezuelan oil imports. This does not seem to be an entirely deliberate political decision. This has to do with domestic commercial decisions in the U.S. If you are going to use heavy oil, in the U.S. you have two choices: Venezuela and Canada. And that is where the policy decision is important with regard to e.g. the Keystone XL pipeline question and people are asking good questions about this. [10] In an interview Daniel Yergin brought this up at the MIT Energy Conference: if you are going to be using these heavy oils, would it not be better to have the Canadians as your partners rather than the Venezuelans, for political and economic reasons? [11] There is a policy element to it once you think about Canada and heavy oils but I think what is driving the action from the U.S. point of view is not at all a policy decision. It is also not a policy decision from Venezuela’s point of view. They say they are diversifying. They have made life difficult for most foreign companies except for maybe Russians, Chinese and Indians. Nevertheless, there are American companies actively involved in Venezuela. This reduction is not even driven by policies. Venezuelan oil production is stagnant or decreasing. So for all of the talk about how they have more oil than Saudi Arabia, the gap production-wise between what they are able to do and what they are doing is growing.

.

. Unconventionals Production

Following up on this: Tight oil seems to offer new opportunities for the U.S. to produce domestically. But this also is a change for China as Chinese National Oil Companies (NOCs) now cannot only invest in high-risk areas but have the U.S. market as an alternative with less political risks.

The fact that the U.S. is the place where this shale production took off might also partially be explained by its safe investment environment as it is very predictable. For Chinese companies it is however also a tricky investment environment, as was seen by the CNOOC deal. It has its own challenges that are different from politically risky places such as Venezuela, Angola, and Sudan. Those come from more regulation, and more legal barriers. So a lot of what is driving these investments is the fact that the shale development is happening in the U.S. The Chinese NOCs go wherever something new is happening and this makes the Americas interesting as well. China is also generally interested in them and has done some deals there. It is going to be an interesting development for both conventionals and unconventionals. We will see what is happening with the energy reforms in Mexico as they could lead to a big change. [12] Argentina also is a place that we are hearing a lot about for shale gas. My understanding is that there are potentially huge volumes of conventional oil and gas in Colombia, which have been inaccessible in part because of the ongoing rebel situation in the countryside. It is a very unsafe place. If that peace process leads to an outcome creating more stability, the conventional or unconventional oil and gas deposits could be developed and everyone is going to be interested, the Chinese included. This however brings a lot of risk. Let’s say it is Colombia: it is an environment with a recent peace settlement. The Chinese along with the other NOCs as well as private oil majors are used to a lot of risk. In the long run, there will therefore not be an inevitable focus of Chinese NOCs on the U.S. or other places having less risky political or investment environments. There is an ongoing debate about the incentives Chinese companies are facing in terms of getting financing or having deals done through the China Development Bank (CDB) where you get the loan-for-oil package, which aids a potential opening that other companies might not have. If you are a private company or another country with a national oil company you might have fewer means than a Chinese NOC. Does that make them more prone of going into places with heavy risk? I think that is part of the answer for Venezuela. They may even have a higher tolerance for risk as we see unconventional oil and gas being developed in places that are not easy to deal with. Mozambique also is one of the biggest shale gas discoveries, not a place known for its stability. [13] That is another really interesting aspect to this entire dynamic: as of right now the shale development is not happening in a major way in China. Chinese companies are however interested in learning about the techniques and the question is whether they will be able to take the knowledge they gain from cooperative ventures in the U.S. back to China and apply it here. My understanding is that the reason of going to allow some of the private oil majors to work in China is part of the same plan. Additionally, cooperating on a joint project such as in Argentina where China is providing the financing and another company is bringing in the technology is part of it. This is going to be the major development for the next couple of years, starting now and going forward as long as the unconventional thing plays out, it is going to be Chinese NOCs increasingly getting involved in the unconventional oil and gas development.

.

. Energy Security

There was a recent article by Charles Glaser where he wrote about the connection of oil and war. [14] His argument is that oil is linked to U.S.-led wars. As you have lived in China for a long time, how do you see the issue of energy security debated in China?

There are probably different viewpoints. The way in which NOCs but also the policy banks like the CDB and EXIM use the logic of energy security to build pipelines, to build ships, to do oil-for-loans deals, to go into places and have access to credit domestically with the logic of them contributing to energy security is most interesting to me. The argument is that they are contributing to energy security through diversification or alternative channels of transportation like pipelines or more secure oil routes. They clearly use that logic and that is where a lot of people with good reason are critical of how far it might take them in case of an actual crisis. They are critical about how far this is good use of national money. The other thing I worry about is that it sets up expectations. Maybe they are contributing on the margin to China’s energy security, but if something goes wrong with the assumptions involved to the extent that people believe those assumptions, it could be very dangerous. That is where I see potential problems even in Venezuela. I am hearing like I did with Libya, like I heard with Myanmar: “This is the U.S doing this. And they are doing it in part to get at us, China.” If you believe that – and that is a gross oversimplification if not just dead wrong – if you believe it and things spiral out of control in let’s say Venezuela and deals are changed and Venezuelans say they are not going to follow through with that, it is not inconceivable that high officials and even official policy could come out accusing the U.S. government of undermining Chinese interest there. The assumptions were wrong in the first place, namely that this is a secure deal. So having this framework is potentially dangerous from an actual conventional security point of view. We see this closer to China in places such as the South China Sea. Maybe CNOOC is building one of their platforms out there in order to help with energy security, [15] maybe not, maybe they are going to make some money out of it, but the idea that you can use the energy security argument to get government support is problematic. Maybe something just doesn’t work out, maybe there is conflict about something, and those deals are always complicated. But to the extent that you believe that this impacts your security you may pick a fight, get angry about it or set expectations with the public, that they are undermining your security when it may only have been a result of a market outcome or complex interaction among countries. Therefore, they may be setting themselves up for unrealistic expectations. That is my biggest worry with all of this. In a way, one should not be surprised that the NOCs are getting what they can. Major corporations all over the world are doing everything possible to get what they can from governments. It just so happens that this government is set up in a way where there might be more things to be done. It is not good for the country and there should be a debate about it because it is the whole country’s money. What worries me more is that the security expectation this brings might not hold.

.

. Upcoming Challenges

Do you already have any take on what the challenges for China are going to be this year?

To me, this is another area where the new leadership has been set up as “the first among equals”. They are very bold about putting out the message that they want real economic reform as only Deng has done before. Since 1978, they have never not reformed, but he seems to be pushing this in a direction that is setting up very high expectations about what this will mean. They say, they are really going to do it, which also is an implied criticism that the last leadership lacked this attitude. It sounds like Deng was the last real reformer and Deng is going to do it again. To me the most obvious thing – also coming from living here – is what he put out there as one of the first things, air quality. I was sort of feeling positive in a surprised way in late December, it seemed nicer than I expected. But then again, lately it has been awful, it has been truly awful. In the last year there has been a major change in the discussion. The fact that Xi as the new leader put this out there as a priority, the fact that the public has been energized about the issue in the social media – this is a big thing. You can see it, breathe it, there is the app showing the numbers and so on. It is palpable in a way that other elements of reform are not. [16] If he succeeds and people think that the air quality is getting better, that might be a bonus for him. But it is also pretty clear on those bad days when it is not succeeding. I do not know what the result of this is. I do not see people out in the street other than with their mask but that is the extent of the protest. So I don’t know at the end of the day how dangerous it is. Leaders everywhere face a risk if you put a very clear measuring post on things, such as the red line with chemical weapons Obama mentioned in Syria. If you do that you lock yourself in so leaders do it at high risks anywhere. Xi has some time to deal with air pollution but it is a huge and complicated challenge. That is something we are going to see over the course of the year and it is tied in directly with what the reform is about and whether it is succeeding. We will see what happens with regard to the finances, they are playing around with the value of the RMB, it is very important but not a matter of life and death as the air quality is.

.

Thank you very much for the interview.

_______________________________________________

[1] More about Prof. Matt Ferchen at: http://carnegieendowment.org/experts/?fa=expert_view&expert_id=626.
[2] The skepticism regarding the Chinese involvement with Venezuela and the focus on Chavez as a person was already made apparent in Matt Ferchen’s Op-Ed in The Diplomat on November 30, 2012, “China’s Misguided Hugo Chavez Love Affair”: http://thediplomat.com/2012/11/chinas-misguided-hugo-chavez-affair More on this also in his contribution: “China and Venezuela: Equity Oil and Political Risk” of February 1, 2013: http://carnegietsinghua.org/2013/02/01/china-and-venezuela-equity-oil-and-political-risk/f9y1.
[3] An overview over the ongoing protests in Venezuela is provided by CNN in the article “Venezuela: What’s the crisis about?” of February 21, 2014: http://edition.cnn.com/2014/02/20/world/americas/venezuela-qa.
[4] “CNPC, PDVSA to start building joint refinery in late April”, Reuters, April 23, 2012: http://www.reuters.com/article/2012/04/23/china-venezuela-refinery-idUSL3E8FN2F420120423.
[5] Interviews with Deborah Gordon (http://carnegieendowment.org/experts/?fa=558) and Wang Tao (http://carnegieendowment.org/experts/?fa=681) are also provided on IR.Asia.
[6] More on the refinery project: http://www.pdvsa.com/index.php?tpl=interface.en/design/salaprensa/readnew.tpl.html&newsid_obj_id=9477&newsid_temas=1.
[7] The Paraguana Refinery Complex in Venezuela is considered the world’s second largest refinery. More on its operation at the PDVSA website: http://www.pdvsa.com.
[8] An overview over the new fuel standards enforced by the Chinese government: http://english.caijing.com.cn/2013-11-19/113583382.html.
[9] More on the reasons for and impacts of this 28-year low in Venezuelan oil exports to the U.S.: http://www.bloomberg.com/news/2014-01-30/venezuela-oil-sales-to-u-s-at-1985-low-shows-china-cost.html.
[10] A key overview over the Keystone XL Pipeline from the promoters: http://keystone-xl.com.
[11] Daniel Yergin’s keynote from the MIT Energy Conference was also mentioned in this Boston Globe article: https://www.bostonglobe.com/business/2014/02/22/fossil-fuels-will-continue-dominate-energy-mix-says-daniel-yergin/bXFiJqIyBocTTRiLsxsxcL/story.html.
[12] More details on Mexico’s energy reform in this Brookings’ report: http://www.brookings.edu/research/opinions/2013/12/23-mexican-energy-reform-opportunities-historic-change-negroponte.
[13] An overview over Mozambique’s natural resources is given by the U.S. Energy Information Administration (EIA): http://www.eia.gov/countries/country-data.cfm?fips=mz.
[14] The article from Charles Glaser is “How Oil Influences U.S. National Security” published in International Security in 2013 accessible at: http://www.mitpressjournals.org/doi/abs/10.1162/ISEC_a_00137.
[15] Details on CNOOC’s deep-sea platform in the article by China Daily of May 24, 2013: http://usa.chinadaily.com.cn/business/2013-05/24/content_16526676.htm.
[16] The Ministry of Environmental Protection gives an overview over the Action Plan on Prevention and Control of Air Pollution of September 2013: http://english.mep.gov.cn/News_service/infocus/201309/t20130924_260707.htm.

Copyright © 2014. All Rights Reserved.

Pin It on Pinterest

function onButtonClick() { // Add this to a button's onclick handler FB.AppEvents.logEvent("sentFriendRequest"); }