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China-Latin America Cooperating When It Comes to the Question of Oil

[Editor’s Note: The following article, published in China Review News, was written by a research analyst from the Chinese Academy of Social Sciences. The article summarizes how China and Latin America have been cooperating with regard to oil supplies.] [1]

In recent years, China’s economic growth has had a “spillover effect,” which has positively affected Latin America. In particular, cooperation on oil has highlighted bilateral relations. On September 16, the UK’s Financial Times reported that, in recent years, China’s strategic investment in Latin America has been growing substantially, mainly in the form of “oil-for-loan” agreements between China’s oil company Sinopec and the Brazilian national oil company Petrobras, as well as by Chinese companies’ purchasing shares in oilfields. China Development Bank signed a 20 billion dollar loan agreement with Venezuela this year. This March, China National Offshore Oil Corporation (CNOOC) acquired Argentina’s Bridas Energy for 7 billion dollars. A few months later, China’s Sinochem Corporation bought a 40% share of a Brazilian oilfield owned by Statoil, a Norwegian national oil company, for 3 billion dollars. In addition, CNOOC and Sinopec are considering investing 7 billion dollars to purchase the Brazilian oil and gas company OGX.

In 1993, Chinese oil companies secured their first Latin American oil service contract in Peru. In the 17 years since then, China and Latin America have continued to develop their oil relationship, which has entered a period of steady increase and cooperation; the “width” and “depth” of their cooperative efforts has continued to expand. Although the U.S. remains the leader in Western Hemisphere energy resources, China’s energy resources in South America are expanding. China has launched small-scale cooperative efforts with Mexico, Central American countries, and the Caribbean nations, but cooperative negotiations with South American countries have been increasing rapidly. Because major oil producing countries in Latin America differ in amounts of resources, supply and demand structures, industry regulations, and technology levels, how China cooperates with each Latin America country over oil is also quite different.

Since 2005, considering China’s total crude oil imports and South America’s total crude oil exports, the percentage of China’s imports from South America has continued to rise. Venezuela, Brazil, Ecuador, and Colombia are China’s major oil import partners. According to BP’s 2009 Statistical Review of World Energy, in 2008, China imported 16.5 million tons of crude oil from South America, accounting for 7.58% of China’s crude oil imports and 6.39% of South America’s exports. Our goal is to achieve a diversification of sources for importing crude oil. From the perspective of our importing potential, based on the proven oil reserves, Venezuela and Brazil could be China’s sustainable sources for importing crude oil.

Diverse Modes of Cooperation

In Peru, Ecuador, Venezuela, Colombia, and other countries, Chinese oil companies have used bidding, mergers and acquisitions, the purchase of shares, and other forms, and have obtained substantial oil exploration and mining rights. Especially after 2003, because some Latin American countries adjusted their foreign policies for energy cooperation, some foreign oil companies withdrew. Chinese oil companies, on the other hand, acquired a number of oilfields as assets and actively participated in the exploration and development projects led by the host countries. In particular, China and Venezuela integrated both upstream and downstream cooperation, which consolidated interdependence and is very good for risk aversion.

With their technical superiority, Chinese oil companies have been able to provide a large number of engineering and technical services to oil producing countries in Latin America. These techniques include geophysical prospecting, drilling, workover, ground engineering, environmental assessment, and construction of power generation and transmission stations. Due to China’s oil companies’ advantage in technology and cost-of-labor competitiveness, providing technical services has not only became an important means of energy cooperation between China and Latin American countries but has also formed a channel for Chinese oil companies to get into the Latin American energy markets. In recent years, Peru and Ecuador have been the main target countries for us to cooperate with by providing technical services, while Brazil and Mexico will be important potential target countries in the future.

China has abundant foreign exchange reserves. Financial services have become the new initiative to promote oil cooperation between China and Latin America and have created a new model for China’s financial capital and industrial capital to get into Latin America. For example, the China-Venezuela fund increased from 6 billion dollars to 12 billion dollars, of which China invested 8 billion, and China Development Bank provided a 10 billion-dollar loan to the Brazilian national oil company, Petrobras. China and Ecuador have also signed a one billion dollar loan contract, and Ecuador will be paying it back in the form of crude oil.

(The author is a Ph. D from the Latin American Department, China Academy of Social Sciences)

[1] China News Service, October 8, 2010