May 10 (Bloomberg) -- Venezuela agreed with China, the world's fastest-growing major economy, to form a joint venture that will produce oil in Venezuela's Orinoco Belt to supply a new 400,000 barrel-a-day refinery they will build in China.

The venture between Petroleos de Venezuela SA and China National Petroleum Corp. will pump oil from an area called Junin 4, where CNPC has quantified reserves, President Hugo Chavez said at a signing ceremony in Caracas late yesterday.

China is securing long-term energy supply deals around the world to satisfy its growing needs. Chinese oil consumption will rise 5.3 percent this year, the International Energy Agency said Jan. 16. Demand rose 6.6 percent in 2006, according to the most recent BP Statistical Review.

``This isn't about an immediate advantage,'' said Pedro Benitez, a professor of political economy at Central University of Venezuela and oil consultant. ``It's more about the political economy of China. It's to maintain a commercial relationship.''

Zhou Jiping, vice president of CNPC, and Venezuelan Energy and Oil Minister Rafael Ramirez, who is also president of the state energy company known as PDVSA, signed the agreement. Chinese Vice Premier Hui Liangyu attended the signing as part of a tour of South America.

China also has supply contracts with Iran and Sudan as it pursues a strategy of bilateral deals in return for development funds rather than purchases on the open market, Thomas O'Donnell, a U.S. Fulbright scholar studying Chinese oil deals at the Central University of Venezuela, said in an interview.

Southern China

PDVSA and PetroChina, the biggest oil producer in China, also agreed to begin studies on the 400,000-barrel-a-day refinery in southern China. Venezuela will be able to supply all of the refinery's needs by the time it opens in 2013, said Eulogio del Pino, a board member and head of joint ventures at PDVSA. The PDVSA-CNPC venture will extract and improve tar-like oil from the Orinoco and export it to China.

China last year promised $4 billion to a Venezuelan development fund. The money is to be repaid in fuel oil. Projects in line for the cash include a factory to make drill pipe for the oil industry, a new steel mill, agricultural projects and the construction of 10 universities, Chavez said.

Venezuela is diversifying its energy markets to reduce reliance on its biggest customer, the U.S. The country sends 300,000 barrels a day to China, Chavez said. Venezuela sent 12,300 barrels a day in 2004, before President Hugo Chavez said it was a priority to increase sales to the Asian nation.

Two company board members said the new refinery won't use Orimulsion, the boiler fuel that Venezuela used to sell at a price much cheaper than its usual price for oil. Days earlier, a PetroChina Co. executive said it would use the low-cost oil.

``Orimulsion is dead,'' del Pino said. Asdrubal Chavez, head of refining, commercialization and supply for the state oil company, said the same thing when asked if Venezuela was restarting shipments, which halted at the end of 2006. He said that while Venezuela intends to ship an average 400,000 barrels a day to China this year, none will be the low-cost oil.

To contact the reporter on this story: Steven Bodzin in Caracas at sbodzin@bloomberg.net.

Last Updated: May 10, 2008 02:39 EDT