SEPTEMBER 2006

CHINA'S ENERGY ENGAGEMENT WITH LATIN AMERICA

By Wenran Jiang
http://www.jamestown.org/publications_details.php?volume_id=415&issue-
_id=3821&article_id=2371339

The People's Republic of China (PRC) is thirsty for energy. From the late-1970s to the mid-1990s, it has managed to quadruple its economy and in the process of doing so, became a net petroleum importer in 1993. China's dependency on foreign energy has only continued to grow as it now imports approximately 40 percent of its consumed oil. Already ranked as the fourth-largest economy in the world, Beijing has now set the goal of quadrupling its economy again by 2020. To achieve the goal, however, the PRC must rely on even greater supplies of external energy. It is, therefore, natural that Beijing has made energy security a national priority. Its quest for additional sources of energy has brought China to Latin America in recent years, a region long considered the backyard of the United States.



An Overview of the Sino-Latin American Relationship

The Sino-Latin American economic relationship entered a honeymoon phase at the turn of the new century. In 2004, 49 percent of China's total foreign investment went to Latin America (Knight Ridder News Service, July 10, 2005). China's trade with Latin America increased 600 percent
from 1993 to 2003, and reached about US$50 billion by early 2005; in the past few years, business deals between China and Latin America have numbered up to 400 [1].

Diplomatically, Beijing's attention to the region intensified at the start of the 21st century when then-President Jiang Zemin took a Latin American tour that included stops in Venezuela, Cuba, Chile, Argentina, Uruguay and Brazil in 2001. Chinese Premier Wen Jiabao traveled to Mexico in late 2003. This was followed by current President Hu Jintao's participation at the 12th Asia-Pacific Economic Cooperation (APEC) leaders' meeting in Chile and a 13-day Latin American visit to Brazil, Argentina, Chile and Cuba in the fall of 2004. Hu then visited Mexico as part of his North American tour in late 2005, which also brought him to Canada and the United Nations Headquarters in New York. Almost all of these visits led to reciprocal return visits by the heads of state of these countries as well as other leaders from the region.

Politically, Beijing has established four strategic partnerships with Latin American countries: Brazil, Venezuela, Mexico and Argentina. Canada was added to the list in the fall of 2005 when President Hu visited Ottawa. There is also Beijing's traditional ideological bond with Cuba. In the broader context, China has also strengthened multilateral engagements with the region. In addition to membership in the APEC forum and observer status in the Organization of American States (OAS), Beijing has also become involved in regional organizations such as the China-Latin America Forum, China-South American Common Market Dialogue and China-Andean Community
consultations, among others.

While China's trade volume with Latin America has overtaken Japan's, it continues to pale in comparison to the $800 billion U.S.-Latin American trade each year (Voice of America, April 19). Latin America's share of China's foreign trade is insignificant: its share of China's imports grew from two percent in 1990 to four percent in 2004, while its share of China's exports rose from one percent to three percent in the same period [2]. From 2001-2005, China's volume of trade with both Africa and the Middle East grew at a faster rate than it did with Latin America during the same period.


Driven to Latin America for Energy

In recent years, energy and resource sectors have represented the most dynamic part of the economic relations forged by China in the region. As China's external energy dependency has deepened in the past decade, so has its sense of insecurity. In order to diversify its sources and to reduce its vulnerability to high oil prices, Beijing has identified Latin America as one of the three major regions (together with Russia/Central Asia and the Middle East/Africa) that may become China's energy suppliers. In fact, the earliest debut of a Chinese energy company in an overseas acquisition was the $250 million purchase of development rights to an oilfield in Peru by a subsidiary of China's largest energy company, China National Petroleum Corporation (CNPC) in 1993 [3]. Coincidentally, this was the same year that China became a net oil importer.

Many Latin American countries are well positioned to attract Chinese proposals for energy and resource cooperation. Beijing's summit diplomacy in recent years has had a clear focus on increasing imports of energy and raw materials from Latin America. In Venezuela, the country with the largest proven oil reserves in the Western Hemisphere, China entered its energy sector through investments that include a $350-million infrastructure project in 15 oilfields, a $60-million gas field project and further upgrades to the country's railways and refineries. CNPC has acquired access to develop oil and gas fields in the country. Venezuela, in return, will provide China with 100,000
barrels of oil each day as well as other fuel oils (China Brief, June 21, 2005). The daily exports have reached upwards of 160,000 barrels per day (bpd) and may reach 300,000 bpd by the end of 2006 (People's Daily, May 17). In order to expand its capacity to ship more oil to Asia, Venezuela's national energy company, Petroleos de Venezuela, S.A. (PdVSA), announced in May 2006 that it had signed a $1.3 billion agreement with China State Shipbuilding Corporation and China Shipbuilding Industry Corporation to purchase 18 oil tankers from China. Currently, Venezuela claims that China receives 15 percent of its petroleum and related products and hopes that the percentage of the petroleum will increase to 45 percent by 2012 (BBC News Chinese, May 12). Moreover, President Chavez has repeatedly called for closer ties with China in the energy sector, often with generic provocative statements such as: "We have been producing and exporting oil for more than 100 years, but they have been years of dependence on the United States. Now we are free and we make our resources available to the great country of China"
[4].

Brazil, China's largest trading partner in the region, has also been expanding its energy relations with China in the past few years. When President Hu visited Brazil in 2004, he brought with him nearly $1 billion worth of investment contracts for Brazil's ports, railways, mining and energy sectors. Large Chinese energy firms signed a series of deals with Petrobrás, Brazil's state oil company, to export crude oil to China and to establish joint ventures for the construction of gas pipelines and other energy infrastructure (ISIS Chemical Business, April 24). During Brazilian Minister for Mines and Energy Silas Rondeau's visit to Beijing in June, the two countries signed a memorandum of understanding (MOU) to establish a committee that would encourage cooperation in the energy and mining sectors. China's National Development and Reform Commission said that the two sides would "exchange information on policies and regulations, development strategies and important projects in the energy and mining sphere," and would encourage cooperation in oil, natural gas, renewable energy and electrical power (Reuters, June 7). Only days later, the Brazilian
mines and energy ministry announced that China International Trust and Investment Corporation would invest $1.1 billion to work on new and existing energy projects in Brazil (Dow Jones Chinese Financial Wire, June 14).

Yixing ( pronounced Yee-shing ) is a small city that became famous due to a unique type of clay that is only found there. This unique clay is called Zisha. Zisha Clay is found in five different colors...red, yellow, green, black and purple. It has been used in pottery for over 3,000 years. The properties of the clay make it the perfect vessel for brewing tea. With use, the teapot absorbs the flavors of the tea which enhances future batches.

In Ecuador, the CNPC-backed Andes Petroleum spent $1.42 billion in late 2005 to purchase oilfields that had been developed by Canadian oil exploration company EnCana. The fields contain proven reserves of 143 million barrels of oil. With an annual bilateral trading volume of $5 billion, mostly in the energy sector, Ecuador's foreign minister Francisco Carrion expressed a strong desire to develop additional energy relations with China. His position has been to achieve greater diversification: "We don't just want to look north [i.e. to the United States], we want to look to all sides and, as the world is getting smaller, we want to be more pragmatic" (Reuters, June 1). In Argentina, China promised an $8 billion investment in its railways, $5 billion investment in energy exploration, $700 million in communications and an additional $6 billion in other infrastructural projects (Diyi Caijing Bao, November 19, 2004). China is already the second largest oil producer in Peru (after Argentina) following its earlier entry into the country (Wall Street Journal Asia, November 24, 2004). China also conducted negotiations with Mexico on energy cooperation [5]. Beijing has invested in Cuba, extended credits to Havana and received contracts to explore an offshore oilfield near the Cuban coast.

Unsubstantiated Concerns

China's extensive energy engagement in Latin America during recent years has become a source of growing concern. Those alarmed at its fast-ascending presence have labeled "China's encroachment on America's backyard" as "the beginning of the 'Sinicization of Latin America'"
(China Brief, November 24, 2004). Yet, China's activities in the region are far less extensive than its investments in the two other energy supplying regions (Russia/Central Asia and Middle East/Africa). In spite of its confrontational rants and its statements praising China, Venezuela continues to export most of its oil to the United States. China now receives more than a third of its total oil imports from Africa, and Angola is second only to Saudi Arabia in supplying China with oil-about a half million barrels a day (Reuters, June 14). Latin America has a long way to go before it can catch up with Africa as an oil supplier to China [6]. When viewed in the overall perspective,
China's oil imports from Latin America are relatively limited. In 2003, they amounted to just one percent of its total oil imports, and even accounting for recent growth, China's oil imports from Latin America remained just above three percent in 2005 (Nanfengchuang, May 8).

Others, particularly those indigenous to region, have viewed China's entrance into the region as a primarily positive development. Some are optimistic that China's investments will serve as a catalyst for economic revitalization and perhaps stabilize the up-and-down economy infamous to Latin American countries. In addition, many hope that the import demand from China will contribute to the growth of the region's economies. While competition from China has recently become a serious
concern, particularly in Mexico, the threat is market-driven and not the result of a PRC mercantilist policy. Leftist-leaning leaders such as President Chavez of Venezuela and President Luiz Inácio Lula da Silva of Brazil have also advocated forging closer ties with China as a part of their efforts to diversify their economies and to wean themselves from their dependence on the U.S. market. Nonetheless, China's engagement with the Latin American countries does not indicate any particular ideological preference and China's energy related activities in Latin America, having increased significantly, do not constitute a particular pattern of planned expansion in the region. There is little evidence to suggest that the series of high-level Chinese visits to the region in recent years and its economic and strategic policies are targeted at undermining the interests of the
United States.


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CHINA'S ENVIRONMENT ALERT:

Local governments were accused of overlooking environmental regulations in the rush for economic development.

"It is especially worrying that most local governments base economic growth on energy consuming industries, disregarding the environment's capacity to sustain industrial expansion," Mr Sheng said. His report echoes the findings from the State Environmental Protection Administration (SEPA) released earlier this month.

In July, China announced it planned to spend 1.4 trillion yuan ($175bn) over the next five years on protecting its environment. The sum - equivalent to 1.5% of China's annual economic output - will be used to improve water quality, and cut air and land pollution and soil erosion.

Meanwhile, water supplies to the city of Hancheng in Shaanxi province were due to resume on Sunday, following an emergency when a nearby reservoir was polluted with 25 tonnes of caustic soda. Officials brought in 10 tonnes of hydrochloric acid to neutralise the caustic soda, which was being carried by a tanker that fell into the Xuefeng reservoir on Friday, killing one person.BBC World News 27th August 2006