GOV DENIES OIL WILL GO TO CHINA

C O N F I D E N T I A L CARACAS 001446

SIPDIS


NSC FOR TSHANNON AND CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD

E.O. 12958: DECL: 04/27/2014
TAGS: ENRG PREL EPET VE
SUBJECT: GOV DENIES OIL WILL GO TO CHINA

REF: CARACAS 1350

Classified By: Amb. Charles Shapiro; for reasons 1.4 (b) and (d)

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SUMMARY
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1. (C) The GOV said once again on April 26 that Venezuela
would continue to be a reliable oil supplier to the United
States. The statement was made in response to a story in
Miami's "El Nuevo Herald" picked up by all leading Caracas
dailies the morning of April 26, which alleges that Chavez
has a secret plan to sell Venezuelan oil to China instead of
to the U.S. Industry experts quoted in the press on April 27
detailed the reasons (from refinery and shipping constraints
to the size of the price discount Venezuela would probably
have to offer to China) why such a deal would be a poor one
for Venezuela. One expert commented to econoff that, while
such a deal might be possible, Chinese interest in it would
be another question, particularly given that it would
inevitably strain China's ties to the U.S. In sum, Chavez
would have to be willing to impose massive losses on
Venezuela on purely political grounds. This cannot be
discounted entirely since Chavez governs by political
instinct rather than economic rationality, but we believe
Chavez is likely to consider cutting off oil exports to the
U.S. if bilateral relations worsen signficantly, or he sees
such a move as important to his survival in power. End
Summary.

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OIL TO CHINA
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2. (U) On April 26, Caracas dailies headlined a story picked
up from Miami's "El Nuevo Herald" alleging that Chavez has a
secret plan to sell one million barrels per day of crude to

SIPDIS
China. Quoting former National Security Senior Deputy
Constantine Menges, the story states that Chavez "is not only
preparing for a radical cut-off of supplies to the U.S., but
also to use oil as a political weapon in order to impede the
reelection of President George W. Bush."


3. (U) Minister of Communications and Information Jesse
Chacon later denounced the story, stating categorically (as
was reiterated in a subsequent press announcement released by
the Vice President's office) that the information was totally
false. Chacon characterized the "El Nuevo Herald" story as a
"dirty war" story, generated by a columist paid by the
Venezuelan opposition. Chacon underlined that the only time
oil exports to the U.S. had been suspended during the Chavez
presidency had occured during the opposition-supported strike
in December 2002. Chacon continued, "We hope and are sure
that this will not occur again, that is, that the U.S. has a
guarantee that the supply will continue, commercial relations
will continue to grow, gas concessions have been granted, a
policy has been designed to diversify our crude and products
in the U.S...."

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BUT, HOPEFULLY, WISER HEADS WILL PREVAIL
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4. (U) On April 27, Caracas dailies reported Chacon's denial
as well as comments from various industry experts attesting
to the pain such an action would inflict on Venezuela's own
bank balances. The analysts quoted in the press cited the
difficulties of diverting Venezuela's heavy, sour crudes from
the U.S. deep conversion refineries, the problems and costs
of shipping Venezuelan oil to China vice the U.S., and the
deep discounts Venezuela would probably have to offer China
in order to sign such a contract. Ciro Izarra, the former
Manager of PDVSA's Commercial Division, speculated to the
press that that such a contract would represent a $2 million
daily loss for Venezuela.


5. (C) Econoff discussed the possibility of China sales with
an industry source who commented that it is conceivable that
China could buy Venezuelan crude. After all, he noted, China
already buys orimulsion from Venezuela. But, he noted, China
has never run a lot of Venezuelan crude through its

refineries. He suggested that the Chinese would want to
purchase a number of test shipments in order to estimate the
economics of a deal. Finally, he added, while such a deal
might be possible, Chinese interest in it would be another
question, particularly given that it would inevitably strain
China's ties to the U.S. Turning to the economics of such a
deal for PDVSA, Venezuela's state-owned oil company, he noted
that PDVSA currently makes its royalty payments to the GOV
based on the actual prices it receives from oil sales. The
Ministry of Energy and Mines is currently pushing, he said,
to shift to a royalty based on a price formula based on U.S.
West Gulf prices -- assumed to be the best that PDVSA could
receive. Any deal with China would probably inflict huge
losses on PDVSA.

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COMMENT
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6. (C) The Chavez administration has once again denied any
intent to divert its oil sales from the U.S. market (although
President Chavez himself has stated that it might use such an
option). On economic grounds, such a decision would be
monumentally foolish. Chavez would have to be willing to
impose losses on Venezuela and on PDVSA on purely political
grounds. This cannot be discounted entirely as Chavez
himself is disposed to stir the pot by his own comments on
the possibility of cutting off oil to the U.S. (reftel).
Doubtless PDVSA has been told to analyze all alternatives to
the U.S. as a commercial partner, but we believe that Chavez
is likely seriously to consider a cut-off only if our
bilateral relations have deterioriated considerably more than
they have already and he sees such a move as important to his
survival in power.
SHAPIRO


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2004CARACA01446 - CONFIDENTIAL