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Exploration & Production: The Oil & Gas Review 2005 - Issue 2 -
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The Economics of Shipping Venezuelan Crude to China - Expro: The Oil & Gas Review 2005 - Issue 2
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Roy Nersesian
Adjunct Associate Professor, Center for Energy, Marine Transportation and Public Policy (CEMTPP),
School of International and Public Affairs (SIPA), Columbia University
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Originally printed in:
Exploration & Production: The Oil & Gas Review 2005 - Issue 2
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China’s energy needs are growing at the same high pace the country’s economy is developing. Therefore, China must now increase its oil intake to satisfy the mounting demand. The country’s domestic oil consumption has significantly outpaced its production since the early 1990s; more than 50% of the country’s oil imports today come from the Middle East. China’s only important oil source in the Pacific Basin is Indonesia – whose own production is in steep decline. Other sources, including Australia, Malaysia and Vietnam, are too small to satisfy a significant portion of Chinese demand.
China has expanded its horizon beyond the Pacific Basin. Its most successful venture to date has been Sudan, where China developed an oilfield and built a 300,000-barrels-per-day oil export pipeline. China has also pursued upstream opportunities in South- East Asia, the North Sea and Canada. Its most aggressive move in 2005 may have been the attempt by China National Offshore Oil Corporation (CNOOC) to purchase the US oil company Unocal. However, China has also made overtures to Latin American producers, including Venezuela, where, in the spring of 2005, a Chinese delegation exploring the possibility of buying Venezuelan oil received a warm reception.
Exporting nations can sell their oil at the loading port, so-called free-on-board (FOB) sales, where the buyer is responsible for transporting the oil. In a cost, insurance and freight (CIF) sale, it is the seller’s responsibility. In theory, the exporter decides whether to sell FOB or CIF to a given market, based on whichever method will maximise the netback value of the exported oil (i.e. the amount of money received for the oil minus the toe cost of transporting it).
Venezuela’s President, Hugo Chavez, has expressed concern about the extent of his country’s dependence on the US as a market for its crude and reducing that dependence is one of the objectives of the discussions with China about possible exports. The economics of this strategy would seem to be unfavourable, though, compared with exports to the US due to the longer distance to China, which would result in much higher transportation costs and, thus, much lower netback values for Venezuela. However, there is a way to offset most of this cost disadvantage.
The round-trip voyage from Venezuela to US Gulf ports is 5,800km. The round-trip voyage to China (via the Panama Canal) is 27,400km, or nearly five times further. The most economic method of shipping Venezuelan crude to the US Gulf is in an Aframax-class tanker – i.e. one between 80,000 deadweight tonnes (dwt) and 120,000dwt. Aframax vessels in the Venezuela/US Gulf trade carry cargos of around 70,000t – i.e. less than their full carrying capacity – because of draft limitations (shallow water depth) in Lake Maracaibo (the waterway surrounding Venezuela’s principal crude loading ports) and in US Gulf ports. The largest cargo that can be carried through the Panama Canal is approximately 55,000t due to beam (vessel width) and draft limitations that restrict vessel capacity and cargo size.
Transiting the Panama Canal involves a toll that would add to the cost of transportation to China. Venezuelan crude oil exports to China on Panamax tankers via the Panama Canal would cost five, or more, times as much as shipping the same crude to the US Gulf.
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Roy Nersesian is an Adjunct
Associate Professor at the Center
for Energy, Marine Transportation
and Public Policy (CEMTPP) of the
School of International and Public
Affairs (SIPA), Columbia University.
He teaches the course â??Marine
Energy Transportation Technology,
Economics and Public Policyâ?쳌 in
SIPAâ??s Program in International
Energy Management and Policy.
This article is based on a paper
with the same title, copyright
© 2005 Center for Energy, Marine
Transportation and Public Policy at
Columbia University.
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