US embassy cable - 04CARACAS1446

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