Volume 45 Number 176,
January-March 2014
A Model for Energy Cooperation between China and Latin America
Sun Hongbo *
Date received: January 10, 2013. Date accepted: May 22, 2013.
Abstract

Relations between China and Latin America have had strategic implications for the current transition of international political and economic power. Specifically, their energy ties have experienced significant advances in cooperation for the oil and gas industries. Energy cooperation between China and Latin America is determined in large part by ongoing changes in the energy makeup of the Western hemisphere. Chinese oil companies employ different methods of energy cooperation: crude oil trade, investments, loans in exchange for oil, the purchase of technical equipment, mergers and acquisitions, etc. As compared to other countries in Latin America, the China- Venezuela model is notable as a unique example that can explain the dynamics of oil cooperation between two countries from a governmental and corporate perspective.

Keywords: Energy interest, energy order, models of cooperation, China-Venezuela model.
INTRODUCTION

Since the beginning of the 21st century, relations between China and Latin America have had a more strategic involvement in current changes to world political and economic order. China has become an important, strategic partner for Latin American countries, in order to diversify its economic and political foreign relations. China has become strategically important for South American countries in particular, from both an economic and political view point, because of China’s increasing power on the international stage. China’s interest in Latin America is to look for natural resources for sustainable internal growth, as well as external support to form a multipolar world.

In terms of energy, this cooperation has awakened a heated debate between politicians and academics throughout the western hemisphere. There is deep suspicion that China will challenge the oil industry and investment flows, dominated by U.S energy interests. Some analysts claim that China will become a geopolitical threat to the energy security of the United States, whereas others, with different views, note that China’s influence in the Latin American energy sector should not be exaggerated, for its involvement is limited. Countries with resources see China as playing a positive role and as having expectations for diversifying its oil exports and sources of foreign capital. In recent years, the Inter-American Development Bank (idb) and Economic Commission for Latin America (eclac), have widely debated trade and Chinese, Japanese and Indian foreign direct investment (FDI) in Latin America, but they have not specifically focused on energy cooperation.

To avoid political explanations of China’s behavior in Latin America, energy cooperation should be analyzed from the government’s perspective as well as that of corporations to build a consistent conceptual framework. It would not otherwise be possible to get behind the dynamics of China’s participation in the Latin American energy sector.

This article makes the following proposals and responds with a cooperation model between China and Venezuela as a case model. Firstly, the main objective of China’s government is to increase food security to the maximum and optimize its oil import sources in Latin America. The priority for the oil companies, on the other hand, is to maximize their profits through market expansion. China’s main energy interests in Latin America include obtaining the benefits of crude oil imports and investment. The way to achieve this is through operations with oil companies abroad. Secondly, the interests of governments and companies do not always coincide when associated with specific energy cooperation programs. Thirdly, regional players such as the states, oil companies and others connected with the cooperation model between China and Venezuela interact with different strategies. What is most difficult to explain is the political and financial links between governments and national oil companies.

ENERGY COOPERATION POLICY BETWEEN CHINA AND LATIN AMERICA

Energy cooperation between China and Latin America dates back to the beginning of the 1960s. In reward for China’s support, Fidel Castro offered China technical materials to explore oil and a refinery nationalized to foreign oil companies. Since then until 1990, China conducted energy programs with favorable countries in Latin America. In 1970 for example, China even exported crude oil to Brazil during the world oil crisis and since 1980, the Chinese government has given technical and financial assistance to build small hydroelectric power plants in Cuba, Ecuador, Colombia, etc. The energy projects implemented by the Chinese government were sporadic and unsystematic and had little to do with energy security issues in the country. Indeed, China took initiatives to satisfy its energy needs in Latin America and consequently has recently made political advances, consolidating its diplomatic recognition in the region.

However, it was not until 1993 that energy cooperation between China and Latin America reached a turning point and China became an importer of crude oil. In 2004, China became the second largest consumer of oil in the world and in 2006, the third importer.1 At the same time, China’s external dependence on oil (the proportion of annual imports for consumption) has increased rapidly, reaching more than 50% (see Table 1). According to projections from different organizations, it is estimated that China’s oil consumption will reach more than 10 million barrels a day by 2020 (see Table 2). This makes energy security and achieving sustainable economic growth a tough strategic challenge for China’s leadership. The political agenda for China’s central government has therefore given great importance to international energy cooperation to guarantee national energy security (oiceroc, 2007).

With the increased dependence on foreign oil, an important pattern has emerged in China’s energy policy, namely to reduce the vulnerability in its supply. For this reason, it has been fundamental to implement diversification strategies in oil imports. In terms of the geopolitical origins of China’s oil imports, the Middle East, Africa and the Soviet Union are the three main suppliers. Obviously imports have concentrated geopolitically in some exporting countries. However, without doubt, China must diversify her imports by making external supply more flexible.

With its abundant sources of hydrocarbons, Latin America is naturally seen by the Chinese government as an important partner for regional cooperation. In October 1993, cnpc, China’s main national oil company won a bid to explore oil in Peru, as a prelude to energy cooperation between China and Latin America. Since then, several programs have been implemented, from oil trade, exploration, to development of technical services, located mainly in Peru, Ecuador, Venezuela, Colombia and Brazil. Energy cooperation has become a fundamental pillar of support to China, particularly to improve its bilateral relations with some Latin American Countries.

However, there are no explicit official documents available indicating details of China’s energy cooperation policy in Latin America. In November 2008, the Chinese government published a White Paper on policy in Latin America, stressing that it wished to expand and strengthen its mutual cooperation with Latin American and Caribbean countries for resources and energy, within the framework of bilateral cooperation.2

From the government’s perspective, China’s politicians consider Latin America a strategic alternative for diversifying oil imports and maximizing energy security, whereby national oil companies can act as agents to achieve this objective at the lowest cost through cooperation operations with Latin America. Government and company interests do not always coincide according to analysis of the theory. It is therefore better to distinguish between the roles of governments and companies. National oil companies closely examine commercial benefit in terms of the market with certain political and economic limitations placed on them by the government. In fact it is not easy to explain the policy making process in detail because of the broad cooperation between governments and corporations – like a black box. However, one point is certain; China’s main concern is to diversify its oil imports in Latin America.

For China, Latin America is not an important energy supplier but a marginal one. In 2009 the volume of commercial crude oil between them reached only 1.77 billion tons. China has imported oil from this region, but it only represents about 7% of its global imports and a similar percentage of Latin America’s3 world exports, whereas the United States dominates the oil trade in the Western hemisphere, representing nearly 70% of total exports from Latin America, this being 30% above the world imports from America.4 Taking into account new offshore discoveries in Brazil and the enormous reserves tested in Venezuela, both countries can be seen as important sustainable energy suppliers of crude oil to China.

From a cooperative perspective, Chinese national oil companies have encouraged a “strategy towards globalization”. Her trade partners in Latin America have undertaken five forms of cooperation: 1) crude oil trade, 2) technical service, 3) joint development, 4) participation in the construction of infrastructure, 5) loans for oil, 6) joint research into biofuels technology. This can be corroborated in several countries which China has been cooperating with (see Table 3).

Regarding the dynamics of cooperation from China’s perspective, the four engines driving China’s entry in Latin America are strong economic growth, government objectives, national oil companies and financial organizations, especially China’s Development Bank, whose interaction has effectively guaranteed the success of oil diplomacy in Latin America. A new emerging tendency is the rise in cooperation between China’s financial organizations and national oil companies whose collaboration increases her financial capacity to expand trade activities related to energy.

The service contracts are such that China’s oil companies are paid service fees, using both the technical service model and participation in infrastructure construction. Oil imports from Cuba only represent a small percentage of these.

In view of the increasing demand for oil from China, and enormous currency reserves, Latin American governments try to absorb Chinese capital into their energy sectors, especially because of the serious effect of the international financial crisis at the end of 2008. All left and right wing political leaders in Latin America show a strong political desire to make China a partner. In other words, given the security of oil exports, these exporting countries want to make China a sustainable strategic buyer. However, it cannot be ignored that they are trying to take advantage of their energy resources, using them as a diplomatic tool to broaden foreign relations, both in the political and economic sphere.

In summary, all of those involved in energy cooperation between China and Latin America seek to maximize their interests. The governments of both consuming countries and oil producers face dilemmas concerning the security of oil imports and exports, in terms of future economic growth and government revenue. This means that they must diversify cooperative partnerships to optimize their potential interests.

Taking Venezuela as an example, her public spending depends to a great extent on income from oil exports. It seems that the intention of the then president Chávez in collaborating with China was to gain some sort of financial support to implement his domestic policy agenda. The extent that China’s energy security is guaranteed by Venezuela and other Latin American countries can be measured by the volume of crude oil imported. Until now, Latin America has been a marginal supplier of oil for China. If all forms of cooperation adopted by China’s oil companies are closely examined, it is clear that not all projects are directly, or largely, related to China’s oil imports. What makes a difference are the commercial strategies adopted by companies for their own economic interests, which perhaps do not always fit within the government’s energy security framework.

COOPERATION MODEL BETWEEN CHINA AND VENEZUELA

Venezuela is the only one of China’s cooperative partner countries in Latin America. Their relationship is testament to advanced development without precedent which took place from the beginning of Hugo Chávez presidency in 1999. Under pressure to safeguard national energy security, Venezuelan oil has been attractive to China’s leadership for many years and has become an engine for bilateral relations.

Unlike other countries in Latin America, collaboration between China and Venezuela can be viewed as a fairly mature model and its special characteristics may be defined as follows: The cooperation model between China and Venezuela is one of plural collaboration. Energy is the mainstay of cooperation extended to infrastructure, high technology, agriculture and other sectors, within the framework of intergovernmental cooperation. It is financed by banks of Chinese oil companies through credit or investment, with the participation of Chinese companies within the model. They should be reimbursed with Venezuelan crude oil.

The architecture of this model can be divided into three integral parts. The China-Venezuela High-Level Joint Commission works like an institutional framework for intergovernmental cooperation, a center of political decision for cooperation. Oil is the mainstay of this cooperation mechanism, with participatory openness extending to other sectors, attracting non-oil companies. To solve the lack of capital, the China-Venezuela Joint Investment Fund operates as a financial consortium with a large credit granted by financial institutions or by companies. Chinese companies will reimburse these institutions in the form of crude oil or through a joint fund. Combined with Venezuela’s interests, this type of bilateral cooperation is extraordinary proof of China’s increasing economic strength at regional level. It is too early to say whether this model has reached maturity, however this shall be seen in future, from a historical perspective.

This model was finalized during a delicate period for Venezuela, when relations between the ex-president Chávez and the White House deteriorated completed. Growing relations between China and Venezuela were a great worry for Washington, for some legislators and experts looked to the Cold War to understand China’s presence in Latin America. They evaluated China’s influence on U.S. interests from an ideological, political, economical and security perspective. In fact, Venezuela plays an important role in U.S. energy security. According to the U.S. Energy Information Administration (eia) Venezuela is the eighth largest exporter of oil in the world, and the largest in the Western Hemisphere (U.S. Energy Information Administration, 2010). Former president Chávez wanted to develop a special relationship with China to use as a tool to balance out the influence of the United States.5 By comparison, China has adopted a more pragmatic approach, seeking trade relations without ideological complications. Although China’s relationship with Venezuela is practical, some still maintain that China’s politics is very opportunistic.6

This point of view ignores the evident fact that China and other emerging powers with a great need for primary material position countries with resources in the political arena, stimulating nationalism on resources. China’s relations with Venezuela can be better understood considering the shift in world economic power and its possible effect on international politics. If economic relations between these two countries were likely to have political implications, their cooperation model could be a valuable example on a regional level to analyze the underlying panorama of world political change. China’s ascent could lead to great political change on a regional level, helping Latin American countries to reduce their dependence on the United States.

CHARACTERISTICS OF ENERGY COOPERATION BETWEEN CHINA AND LATIN AMERICA FROM A COMPARATIVE PERSPECTIVE

In the last decade, energy relations between Asia and Latin America have advanced considerably in the oil industry. Both regions have gradually strengthened their energy cooperation in crude oil trade, investment, the purchase of technical equipment and services, mergers and acquisitions and, in particular, as a driver to ensure oil supply to China and India. In the context of geopolitical change to the dynamics of world energy supply and demand, Latina America has an abundant supply of hydrocarbons, whereas Asia, with China and India, its engines of emerging growth, have experienced a rapid rise in energy consumption. This has led both regions to explore their potential complementarities in the energy sector.

APPROACH TO THE STRATEGY

In terms of how the strategy is adopted, China’s oil companies can be described as decisive, and lovers of risk and of opportunity in Latin America, whereas Indian oil companies are more cautious, taking small steps towards acquiring oil. The most significant feature of India’s strategy when beginning cooperating on oil projects is to proceed step by step in an active, participatory way with national oil companies in Latin America. This is something preferable to China’s more aggressive spontaneous approach to energy in the region.

SELECTING PARTNER COUNTRIES

Partner countries cooperating with China in Latin America, including Venezuela, Brazil, Ecuador, Mexico, Cuba, Costa Rica, Peru, Argentina and Colombia benefit from wider coverage. In spite of their more timid cooperation in Latin America, three countries are China’s main objective – Venezuela, Brazil and Ecuador – and represent almost 80% of China’s investment in oil. Considering their political regimes, China’s previous partners varied enormously on the left-right wing spectrum.

By comparison, India considers several factors when investing in Latin America, including the country’s potential resources, political stability, and the nature of bilateral relations with potential partners. From 2006 to 2010, India launched 18 cooperation projects to explore oil in Latin America, of which the majority (75%) are in Brazil and Colombia. China has very few cooperation projects with left wing governments in the region.

The window of opportunity for entry

China’s oil companies secured a window of opportunity three times in Latin America: the opening of the hydrocarbons industry and its privatization in the 1990s, the nationalization of left-wing governments (2003-2007) and the international financial crisis (2008-2011). In 1993, the cnpc, one of China’s national oil companies, won the bid to explore oil in Peru, a milestone for beginning energy cooperation in Latin America. In 2010, 13 large, new contracts were made with Chinese oil companies in Latin America, including mergers and acquisitions with international oil companies such as Repsol, Pan American Energy and Occidental Petroleum (Sun Hongbo, 2011).

However, Indian oil companies’ entry into Latin America came a little late. In 2003, India signed a memorandum of understanding on oil and gas with Brazil and in 2006 and 2008 similar agreements were signed with Colombia and Ecuador respectively (Mesquita Moreira, 2010:77). In fact, until 2006 Videsh (ovl) a wholly owned subsidiary of India Oil and National Gas Corporation Limited (ongc) had developed various exploration projects in Brazil, Cuba and Colombia. From 2007 to 2008, ovl broadened its investment in interests in blocks across Colombia and Brazil, and established a joint company with Brazil.

The level of guaranteed energy security

Latin America is still not currently a firm supplier of oil to meet the energy needs of Asian giants such as China, India and Japan. However, these countries consider Latin America a potentially strategic region for diversifying crude oil imports. Measuring the level of energy security safeguarded by Latin America for Asian countries, the volume of crude oil imports from the region is marginal, but the percentage trade volume of Latin American exports and Asian imports has grown at a constant rate (see Table 4). From 2004 to 2010, Latin American exports of oil to Asia rose in proportion to global exports from 4.38 to 18.80% (bp, 2005 to 2011) (see Table 1).

China imported 25.3 million tons of crude oil from Latina America in 2011, representing 8.6% of China’s world imports and 10% of exports from Latin America. Meanwhile, India did so with 11 million tons, that is 6.2% of world imports to India and 4.4% of total exports from Latin America (bp, 2011). It is evident that products derived from petroleum have dominated the structure of imports from India to Brazil, Colombia, Mexico and Venezuela (see Table 6). Taking into account the new discoveries made offshore in Brazil and the enormous reserve in Venezuela, both countries, without doubt, can be seen as the main strategic, sustainable suppliers of oil to China and India in future.

Cooperation models

The cooperation models between China and Latin America are highly comprehensive in the hydrocarbons industry, including technical services, crude oil trade, exports of technical equipment, refining, and backed loans for oil projects. The guarantee of energy security, national oil companies and financial entities which are part of the “strategy towards globalization”, especially for China’s Development Bank are key factors which are highly integrated into China’s policy initiatives towards Latin America. A new emerging tendency here is the increased cooperation between financial bodies and national oil companies. Their trade patterns in Latin America can be examined and summarized by the six forms that their cooperation has taken: 1) crude oil trade, 2) technical services, 3) joint development, 4) participation in building infrastructure, 5) loans for oil and 6) joint research into technology for biofuels.

In terms of Indian investment in Latin America, Videsh has also adopted various cooperation modalities. India prefers to establish cooperative partnerships with local national oil companies instead of western international oil companies (see Table 6). In April 2006, Videsh obtained a 10% share in a Block in Shell’s Campos Basin, Brazil.7 From 2008 to 2010, Videsh strengthened cooperation with Petrobras with a share of interests in blocks in deep waters offshore. In Colombia, ongc and Sinopec created a joint company, Mansarovar Energy Colombia Limited (mecl) to acquire Omimex de Colombia Ltd. in September 2006. From 2007 to 2008, Videsh increased its participation in Colombian blocks in deep waters offshore with Ecopetrol. In April 2008, India and Venezuela signed a joint company agreement to develop oil fields in the Orinoco Basin in Venezuela. In February 2010, the Indian-Venezuelan oil companies granted a 40% share to a “mixed company” which would develop Carabobo 1 North Block and Carabobo 1 Central Block in the Orinoco oil belt in East Venezuela.

Scale of Investment

Indian investment in oil is fairly small compared to China’s contracts for 1 billion dollars and rarely exceeds 10 million (see Table 6). Because of India’s small development and more calculated approach to investment, it rarely experiences resistance on the part of host governments in the region. Neither does its investment generate significant public opposition. As well as large scale contracts for loans in exchange for oil with Venezuela, Brazil and Ecuador, Chinese national oil companies launched major acquisitions nearing 18 billion in Latin America in 2010 (see table 7).

Renewable Energy

Both China and India give great importance to cooperation for renewable energy in Latin America. Since the 1980s, China has given technical and financial assistance to build mini hydroelectric centers in Cuba, Ecuador, Guyana, Colombia, etc. In 2006 China helped Cuba build a production line of solar cells with Chinese photovoltaic technology. In 2009, a Center for Climate Change and Energy Technology Innovation was founded with Brazil. At the third China-Caribbean Economic and Business Cooperation Forum in 2011, China announced help for Caribbean countries to build new small-scale energy projects, such as solar energy and also that it is considering investment in lithium in Bolivia. In 2011, China Xinjiang Goldwind Science and Technology started to export wind energy technical equipment to Ecuador and China.

In March, as part of the India-Brazil-South Africa Dialogue Forum (ibsa), India and Brazil discussed the possibility of cooperating on biofuels. In 2002, both countries signed a memorandum of understanding for renewable energy. In 2008, India signed a similar one with Mexico. Within the politics of technical and economic cooperation, India helped to set up solar panels in Cuba and Costa Rica (Tuchman and Dukkipati, 2010). In 2006, Suzlon Energy Ltd., an Indian wind energy company secured a project in the North East of Brazil. India can also expand in ethanol with Brazil and solar energy with Argentina (ibidem).

CONCLUSIONS

With its booming economy and rapid growth influencing the international scene, China is increasingly more attractive and important to Latin American countries, allowing them to diversify their political relations and external economics. The economic interdependence between China and Latin America has gradually strengthened making Latin America of strategic economic and political importance for energy growth in China.

Latin America, with abundant hydrocarbon resources is naturally seen by China as an important partner for international energy cooperation. For both regions, the main objectives of their governments are to maximize their imports of oil or guarantee export through geopolitical diversification strategies, while benefits to the oil companies are increased through different trade operation patterns. The extent that China bases its energy security in Latin America can be measured by the volume of crude oil imported from the region, which until now is only a small part of China’s oil supply. It is difficult to explain in detail the political and economic interactions of the processes which make up policy between governments and national oil companies.

The cooperation model between China and Venezuela is a special case within the energy cooperation scene between China and Latin America. This model has evolved to have its own characteristics, a policy center, open participation and a financing consortium; in essence its innovative design lies in various agreements including the four contractual structures of hidden bilateral political relations, energy cooperation agreements, auxiliary collaboration with indirect impact on public spending related to oil in different sectors and the financial payments system.

Although there are no explicit official documents available to shed light on China’s energy cooperation policy in Latin America, to an extent, this can be clarified through analysis of China’s political intentions and the behavior of national oil companies. From the government’s point of view, politicians consider Latin America to be an alternative strategy for diversifying crude oil imports, thus maximizing energy security. National oil companies can act as agents to reach this objective at a lower cost through cooperation operations in this region.

When China’s oil companies operate in Latin America, they should take into account not only their national energy needs, and their own international operational interests, but also regional policies, changes in specific policies and other diverse factors. To face the relatively complex business environment in Latin America, Chinese companies need to learn more about the location and develop appropriate expertise in human resources.

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* Latin American Institute, China Academy of Social Sciences, China, sunhb@cass.org.cn

1 Energy Information Administration, Country analysis briefs: China, July 2009. Consensus has not been reached on China’s changing position in world energy consumption and oil imports because of the differences between official data in China and statistics from some international research organizations. In July 2010, calculations based on the International Energy Agency (iea) preliminary data show that China has overtaken the United States as the main world consumer of energy. See http://www.iea.org/index_info.asp?id=1479.

2 Ministry of Foreign Affairs of the People’s Republic of China, China’s policy paper on Latin America and the Caribbean, Beijing,
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3 Data provided by the author based on the bp Statistical Review of World Energy from 2005 to 2010.

4 Data provided by the author based on the bp Statistical Review of World Energy , July 2010

5 Peter Hakim, “Is Washington Losing Latin America?” Foreign Affairs , vol. 85, num.1, January /February 2006, pp. 40-53.

6 William Ratliff, “Pragmatism over ideology: China’s relations with Venezuela”, China Brief , vol. 6, num. 6, James Foundation,
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7Shell, Petrobras and ongc announced changes to the BC-10 contracts and entry to ongc Videsh Ltd. (ovl), 26/04/2006, http://www.shell.com/home/content/media/news_and_me-dia_releases/archive/2006/changes_bc10_holdings_26042006.html

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