EXCLUSIVE-UPDATE 2-China, Venezuela refinery gets Beijing's nod

Published: 21 Jan 2010 17:03:48 PST

* Approval clears partners to start feasibility studies

* Likely China's first major refinery after 2010

* Helps Venezuela to cut dependence on U.S. market (Adds details)

BEIJING, Jan 21 - China has given the greenlight to a giant $6-billion joint venture refinery between state energy firm CNPC and Venezuela's state oil firm PDVSA, a key step that will further cement energy ties between Beijing and Caracas.

The refinery, Venezuela's first in Asia, will secure the Latin American exporter and OPEC member a solid market outlet for its crude as leftist President Hugo Chavez aims to cut dependence on its main client and political rival, the United States.

Since 2006, Venezuela has handed out dozens of oil blocks to countries from Vietnam to Uruguay, with Chavez using his "oil diplomacy" policy to secure goodwill from the countries that benefit from access to some of the world's largest oil reserves.

For China, a refinery investment of this size will help lock in fresh long-term crude supply, outside the dominant Middle East exporters, to produce much-needed fuel to power an economy that expanded at 10.7 percent in the last quarter of 2009.

The approval, granted late in December by China's National Development & Reform Commission, clears the partners to start feasibility studies for the 400,000 barrel-per-day refinery that could cost more than $6 billion, industry and official sources told Reuters.

"It is significant...The refinery will help Venezuela to achieve its goal of steering away from the United States. For China, it's a big amount of guaranteed crude supply. All the drivers are in place to make this project happen," said Victor Shum of Purvin & Gertz.

At 400,000 bpd, the amount is roughly 10 percent of China's total daily imports of crude. China has overtaken Japan as the world's No.2 crude buyer and its crude imports now make up half that is consumed.

The refinery, in Jieyang city of Guangdong province, China's largest export hub, will probably be the first major greenfield refinery China plans to roll out after 2010, following a wave of capacity build-up in the last 15 years to feed a rapidly expanding economy.

The other two major refineries in the pipeline are the proposed project between Kuwait and Sinopec Corp, also in Guangdong province, and a third in northern China under a tie-up between CNPC and Russian state oil firm Rosneft

"The approval was given in late December," said an industry executive familiar with the mega project. A government official confirmed the approval.

CHINA, VENEZUELA OIL FLOWS

Until now, the oil trade between the world's No.2 oil user and Latin America's largest oil exporter has consisted mostly of fuel oil, a heavy refinery product used to power ships and make electricity.

Venezuela is selling most of its fuel oil output to CNPC, a volume of 207,000-253,000 bpd under a deal in early 2009 that is chained to a Chinese loan of $8 billion.

Its crude sales to China were a meagre 85,000 bpd, despite socialist leader Chavez's repeated boasts of sending to China by 2010 one million bpd of oil, or the amount shipped to the U.S.

"Logistical cost would not favour shipping Venezuelan crude to Asia. It's really a political decision on the part of Venezuela to supply this part of the world," said Shum.

A joint venture between CNPC and PDVSA in the Orinoco heavy crude region is currently producing 80,000 bpd. CNPC and second-largest Chinese oil firm, Sinopec, are belived to be keen to participate in the massive giant Carabobo oil project.

The socialist Chavez nationalized the OPEC nation's oil industry in 2007 by forcing oil companies to take a minority share in projects and has since brought many oil service companies under state control.