Venezuela to borrow $4 bln from China, pay in fuel

nnettBy Brian Ellsworth
CARACAS, Nov 6

Venezuela agreed on Tuesday to borrow $4 billion from China and repay the loan with fuel, as leftist President Hugo Chavez boosts ties with the Asian economic powerhouse and seeks distance from the United States.

The former soldier has worked to reduce the OPEC nation's traditionally close ties with the United States, which depends on Venezuela for some 12 percent of oil imports, through a self-styled socialist revolution that promises to end U.S. "imperialism."

Chavez and representatives of China's development bank signed an accord to create a $6 billion investment fund that will finance development projects in Venezuela.

"This contract has the goal of supplying fuel oil to the Chinese market to repay the financing by the China Development Bank," said a government official who announced the contracts during a televised ceremony.

Chavez has promised to more than double oil and fuel shipments to China as crude prices roar toward $100 per barrel and the communist country is scouring the globe to secure increasingly scarce oil reserves.

"China can count on us continuing to increase the supply of fuel until 2010, 2011, to 1 million barrels per day," Chavez said during the ceremony, minutes after saying Venezuela plans to supply 350,000 bpd by the end of this year to China.

Despite high oil prices Venezuela is borrowing record amounts of money to help finance Chavez's massive social development crusade that has been key to him winning the support of Venezuela's poor and repeatedly sweep elections.

Pollsters say he will win approval in a December referendum for a constitutional overhaul that will allow him to remain in office indefinitely and give the president direct control over international reserves.

BARTERING WITH OIL

Venezuelan state oil company PDVSA, which has borne much of the financial burden of the social development efforts, has increased the practice of borrowing money and settling debts by directly paying in oil and products.

China's loan to Venezuela will be repaid with a product called fuel oil, a residual refinery product often used for power generation that is worth considerably less than motor fuels such as gasoline or diesel.

Venezuela's refineries have suffered repeated accidents and outages over the last year which may leave them producing large quantities of fuel oil, because converting fuel oil to higher grade fuels requires complex refining processes.

PDVSA earlier this year borrowed $3.5 billion from a group of banks and trading houses in energy-thirsty Japan that was repayable in fuel and products.

It also settled a debt this year with BP Plc and France's Total by paying them crude oil for seizing their assets during a dispute over an oil field instead of compensating with cash.

International energy agencies say PDVSA's oil production is around 2.5 million bpd, about 25 percent less than official production levels close to 3.2 million bpd. (Reporting by Brian Ellsworth; editing by Jim Marshall)