Chinese energy company PetroChina, a subsidiary of China National Petroleum Corp., announced May 6 that within the next week it will sign a deal with Venezuelan oil company Petroleos de Venezuela (PDVSA). While Venezuelan President Hugo Chavez has made numerous similar announcements, with little to no follow through, this agreement appears to be serious given that the announcement came from the Chinese. The deal allows Chavez to increase ties to China, but will cost him revenue. Besides the possibility of oil exploration in Venezuela, the deal includes the joint construction of a 400,000 barrels per day (bpd) refinery in China's Guangdong province designed to process Venezuelan bitumen oil (extremely heavy, sour oil) into orimulsion, a fuel developed and patented by PDVSA. Orimulsion is used to generate electricity and is created by mixing about 30 percent water with bitumen oil and surfactants, which allow the oil and water to mix. As exported by Venezuela, it has been generally priced to compete with coal. The sale of orimulsion has declined as PDVSA has found that by diluting bitumen with lighter, sweeter crude, the energy firm can market it at a higher price as "normal" crude. Fundamentally, shipping oil from Venezuela to China is a dicey prospect. Oil tankers too big to fit through the Panama Canal are forced to go around the southern tip of South America before beginning the long hard slog across the Pacific Ocean (or the other direction, around Africa). For China, the financial costs of importing oil from Venezuela are high, and the risks of extending supply lines across such long distances cannot be discounted. Given these challenges, importing oil from Venezuela is generally prohibitively expensive. In order to make the deal financially viable, Venezuela has most likely offered to cut the price of its bitumen exports drastically. The deal is good for China because the capital investments will be made on Chinese territory, providing jobs and infrastructure. Furthermore, diversifying sources of fuel and reducing dependence on the Middle East is a very attractive idea for Beijing, even if it means relying a bit on politically tumultuous Venezuela. For Chavez, the allure of this deal is locked into his policy of finding political and trade alternatives to the United States. Chavez has prioritized the shift of Venezuelan energy exports away from the United States, Venezuela's biggest trading partner, as a way of asserting Venezuelan independence. Energy exports to China have been rising in the past few years, hitting 80,000 bpd in 2006 (or about 3.6 percent of total exports) — twice the amount of exports from 2005 according to the U.S. Energy Information Administration. An increase of 400,000 bpd would make China the destination for around 22 percent of Venezuela's exports. The downside is that Chavez is selling a significant chunk of Venezuela's yearly exports at a cut rate, putting pressure on an overburdened and underequipped PDVSA. With PDVSA subsidizing the Venezuelan government's populist policies, even though oil prices have spiked at more than $120 per barrel the oil company might be unable to devote the funds necessary to boost flagging production.