China has become a first-class partner of Latin America, and is now decisively involved in this market. Foundations have been laid for a long-term relationship, and both partners benefit significantly from the agreements being made.
More specifically, the Asian giant has made considerable investments through loans and the aquisitions of oil companies, in order to diversify its supply sources, securing extremely competitive prices.
In a context of high prices, the data provided by Chinese customs suggests that China is paying less per barrel for oil from Latin America than it does from many other regions. Yet despite the hefty investments and loans of recent years, Latin America still represents a small percentage of China’s total oil imports.
On the other hand, these more economically advantageous contracts could be harmful for Latin American producing countries. However, in a context of oversupply following the oil shale boom in the United States in recent years, which has taken market share from Latin American oil, these countries have secured a range of new clients, to replace previous ones in the Middle East, Iran, Russian Federation and Angola.
How it happened
China has thus become the second investor in the region, after the United States. The former’s entry into Latin America, as in other parts of the world, has been facilitated by a system of financial flows from China’s state banks that enable companies to invest large sums of money and governments in the region to finance social investments (including housing) or infrastructure (including roads and transport).
In terms of oil, Venezuela is one of the main recipients of Chinese investment, and has announced multi-million dollar agreements to exploit the Orinoco Oil Belt.
It is also the country that has been awarded the most loans from China, most of which are guaranteed with oil sales agreements.
In recent years, Chinese oil companies have expanded their strategy by purchasing assets belonging to private companies and, in many cases, establishing joint ventures with them. Direct foreign investment from China in Latin America and the Caribbean was limited until 2010. According to the Economic Commission for Latin America and the Caribbean (ECLAC), in the last two decades China invested around 7 billion in the region.
2010 marked a turning point, with an investment flow estimated at almost $14 billion, which represented 11% of the total foreign investment received by the region. This was caused by unprecedented investments carried out by the Asian petroleum giants Sinopec and CNOOC in Brazil and Argentina, respectively. These were not the only operations; indeed, numerous Chinese companies from a variety of sectors became involved in the region or increased their presence considerably in 2010. In the following years, Chinese investment continued to flow into the region, estimated at between $9 and $10 billion a year.
One issue is that the official data on investment from China in Latin America and the Caribbean does not give a true picture of the reality, due to the Chinese companies’ custom of channelling the majority of their investments through third countries, which makes it particularly difficult to identify bilateral investment flows.
One example of this is the largest Chinese acquisition in the region to date, the purchase of 40% of Repsol’s operations in Brazil for $7 billion dollars. This was registered as an investment from Luxembourg, as the operation was channelled through the Luxembourg branch of the Chinese company. This is a habitual practice among companies worldwide, but is particularly common in China. The graph above thus presents the direct Chinese investment based on estimations produced by ECLAC, using data from the companies and other complementary sources.
Oil, the region’s greatest asset
China is principally drawn to Latin America by its raw materials, above all oil, followed by mining and agriculture, and the manufacturing industry. Importantly, China is now the world’s most populous country, with a rapidly growing economy that has made it the greatest energy consumer and producer. The rapid increase in demand for energy, and in particular liquid fuels, has given China a considerable influence in global energy markets. The Asian giant has recently become the first net importer of oil, having overtaken the United States, according to data from the United States’ Energy Information Administration (EIA).
In the extraction of oil and gas, China is one of the highest investors in Argentina, Brazil, Colombia, Ecuador, Peru, and Venezuela, and has invested heavily in these markets in the last ten years, in both the exploitation of metals and energy projects. Interest is particularly keen in Peru, where the energy sector, followed by mining, receives the greatest Chinese investment. The Vaca Muerta deposit is of great interest to Chinese capital, which is aware that multi-million profit could be derived from the potential of non-conventional oil on the short and medium term.
Mexico is the next frontier for Chinese investors. Opening up access to its oil reserves offers the country, currently governed by President Enrique Peña Nieto, a golden opportunity. China Petroleum Pipeline Engineering (CPPE), China National Offshore Oil Corporation (CNOOC) and China Petroleum & Chemical Corporation (Sinopec) have maintained a dialogue with the Mexican authorities in order to gain access to the latter’s market.
China’s four largest oil companies, CNPC, Sinopec, CNOOC and Sinochem, are all state-owned and have invested considerably in Latin America. CNPC’s relationship with the region goes back the furthest, and its traditional mode of entry is through state concessions or joint ventures with the state oil companies. It is currently present in Ecuador, Peru, and Venezuela.
As stated earlier, Sinopec has also made large-scale agreements in Brazil, such as acquiring the country’s Repsol branch and purchasing the operations of the Portuguese company Galp for over $5 billion. Sinopec also bought the United Statesowned Occidental Petroleum for $2.4 billion. As for CNPC, it has become the second-largest oil company in Argentina, after the nationalized YPF, following a series of multi-million dollar partial acquisitions of
various companies. A key factor in these companies’ modus operandi in Latin America is their numerous services to provide a range of business solutions, including financing. As a matter of fact, the rise of upstream in the region has fostered the business activity of oil service companies, as well as the export of derived materials of oil and equipment.
These companies are also highly interested in the requirements of all stakeholders in the target country, and strive to help the local communities. Over the years they have invested in public welfare campaigns along with their local partners, and participated in initiatives for poverty and disaster relief and the assistance of vulnerable groups.
The extent of the partnership with China
China is only beginning to explore the potential represented by Latin America. Of particular significance are the initiatives carried out by countries of the region to attract greater foreign investment. For example, Mexico is preparing a tax framework that paves the way for international oil companies. Venezuela, meanwhile, have a Special and Strategic Development Zones, in particular in the Oil Belt, to encourage the inflow of foreign capital, while Colombia will establish new free trade areas to develop its offshore resources.
China is already preparing for these new opportunities, and this year its president, Xi Jinping, committed to invest $250 billion in the region over the next ten years. According to an article published in China Policy Review, in 15 years China will overtake the United Sates as Latin America’s largest trading partner, and bilateral trade between China and Latin America is expected to rise to $500 billion over the next few years.