in Latin American Energy: China Stakes Its Claim What It Means for the Region, the U.S. and Beijing
Energy & Sustainability Program
China Stakes Its Claim in Latin American Energy: What It Means for the Region, the U.S. and Beijing
e are pleased to present the Institute of the Americas Energy & Sustainability program’s latest report: China Stakes Its Claim in Latin American Energy: What It Means for the Region, the U.S. and Beijing. The People’s Republic of China (China) has become a major investor, lender and actor across the energy sector in Latin America and the Caribbean (LAC). Indeed, loans and investments from China have financed an impressive array of projects in infrastructure, energy and mining. With more than $58 billion invested between 2000 and 2019, China has clearly, as our report title notes, staked a claim in LAC’s energy sector. With the contours of the global energy transition and increased attention on reducing emissions and climate action spurring huge growth in renewable energy, China has flexed its muscles in that segment of the global energy sector and in LAC. Our report seeks to underscore a highly significant development for LAC and the United States: China’s control and dominant position in critical minerals, renew- able energy and electric networks have accelerated in the last few years. As with the more nuanced and contemporary aspect of China’s push into renewables and critical minerals, the Asian giant’s reach into LAC of late has been channeled through major acquisitions and projects won in interna- tional bidding. In 2020, Chinese M&A deals in LAC energy reached $7.7 billion, according to Bloomberg, or 25% of Chinese acquisitions worldwide. From renewables auctions in Colombia and acquisition of Mexico’s largest private renewable energy firm, to takeovers of major transmission and distribution compa- nies in Brazil and Chile, our report unpacks this new and less well-known facet of China’s economic and financial W
connections in LAC. China is furnishing countries across LAC with some of the world’s most advanced technology – solar and wind power systems – at highly competitive prices, thus gaining an edge on other international competitors. As the world’s largest oil consumer, China’s efforts to secure supplies in key markets such as Venezuela, Ecuador and Brazil are also noteworthy. China’s enormous loans and investments in the oil patch and deals with the national oil companies (NOC) of these nations have been well-documented. More recently, a major oil discovery in Guyana’s offshore counted a Chinese NOC as part of the consortium, underscoring China’s continued interest in key oil projects. LAC’s so-called debt trap element is discussed in our report, particularly with a nod to the relevance of the Chinese government’s supply of unknown sums in off-the-books financing to the region. COVID-19 economic impacts and deficit spending across most countries in LAC will only accentuate this issue. Our report concludes with an effort to inform the discussion for the Biden administration and Democratic majorities in both houses of Congress. It is a moment that is ripe for reset. Indeed, the new administration has an opportunity to strengthen US-Latin America relations by encouraging private investment, particularly in mining, clean energy and infrastructure projects. The report assesses how the Biden administration can deal with the challenge of China’s growing reach in the economies of LAC and its often unfair trade and invest- ment practices. As it moves beyond the Trump adminis- tration’s relations across the Western Hemisphere, we highlight the need for the new Biden administration to respond to China’s expanding role in LAC’s energy sector, including recent mergers and acquisition (M&A), and ways to address some of the geopolitical conse-quences of these investments.
COVER IMAGE Chinese yuan on the map of South America. Photo : Oleg Elkov / Alamy Stock Photo
Across Latin America and the Caribbean (LAC), loans and investments from the People’s Republic of China have financed an impressive array of projects in infrastructure, energy and mining. Energy projects include oil, gas, electric power generation and transmission, renewable energy and strategic minerals. minerals. Amounting to more than $58 billion between 2000 and 2019, these funds were supplied by China’s state- owned banks and corporations, plus China’s Belt and Road Initiative (BRI), a long-term, international investment program. Chinese private companies, which often receive financial support from the government, provided additional funds. On top of figures available to the public, the Chinese government likely furnished unknown sums in off-the-books financing to the region. China is a major energy player in LAC. According to China’s Global Energy Finance database at Boston University, the country committed $58.4 billion to LAC’s energy sector between 2000 and 2019. Of the total, 83% went to projects in oil and natural gas, 12.8% to hydroelectric power, 2.2% to solar, 1.5% to “unspecified” and less than 1% to coal, wind and biomass combined. BRI energy projects were part of the total between 2017 and 2019, with 56% of BRI outlays going to oil and gas, and 39% to renewables.
But there are potential risks. The long-term impact of Chinese government funding to Latin American nations is far from clear. What is the real cost of the debt secured for energy projects across the region and the resulting social, labor, environmental and governance issues? Real debt levels are unknown, since China often does not reveal details of its financing arrangements. China typically requires that projects receiving Chinese money exclusively purchase Chinese-made materials and equipment, use Chinese professional services and Chinese personnel, creating friction with regional manufacturers and workers. The Asian superpower has been successful in expanding its presence in LAC energy, mining, trade and other sectors by supplying abundant soft loans, investments and other types of financing from government banks, the massive BRI initiative, state- owned companies and private Chinese firms. It also furnishes regional countries with some of the world’s most advanced technology – such as solar and wind power systems – at highly competitive prices. Chinese credits and investment generally are welcomed as alternatives to private financing sources or to fill budget gaps. They were particularly welcomed
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in a nation – like Venezuela – that has limited access to commercial loans from abroad or direct foreign investment (DFI). In Venezuela, the situation is compounded by its desire to avoid the onerous requirements of international financial institutions. How will the Biden administration deal with the challenge of China’s growing penetration in the economies of Latin America and the Caribbean, and its often unequal competitive practices?
metal used in batteries for mobile phones, laptops and electric vehicles, as well as by the military and aerospace sectors. Chinese influence could also impact the positions of some LAC states in international fora, like the United Nations.
Where does the money come from?
Over the past two decades, China has become a major global lender with direct loans and trade credits of more than $1.5 trillion to more than 150 countries across the globe 2 . China’s outstanding claims now exceed more than 5% of global GDP 3 As a result, China has become the world’s largest official creditor, surpassing official lenders such as the World Bank and IMF, or all OECD creditor governments combined. 4 That said, because China does not fully report on its international lending, there is an incomplete picture of how much money countries around the world owe China and under what terms. If anything, China’s total global lending is likely to be significantly higher than reported estimates. 5 China’s lack of transparency in its global lending creates a hidden debt problem with significant consequences associated with international surveillance, sovereign risk pricing and payment
The growing dependency by some LAC countries on Chinese debt financing, coupled with an uptick in M&A activity, 1 may jeopardize the potential for future political and economic cooperation with the United States. China’s growing regional influence could, over time, imperil access by U.S. businesses to rich Chilean, Bolivian and Argentine deposits of lithium, a strategic
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seniority for debt issued by other non-Chinese financial institutions. 6
China finances a broad spectrum of international projects through two giant state-owned financial institutions - the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM) - as well as through its massive BRI program, primarily focused on infrastructure projects. Chinese private companies also finance projects overseas directly and with support from government financial entities, as do government owned enterprises, like China’s state-owned oil company, China National Petroleum Company (CNPC). CNPC is an international oil and gas company that operates in over 30 countries and had more than 460,000 employees in 2019. CNPC reported reserves of 3.7 billion barrels of oil equivalent and produced 181 million metric tons of crude in 2019, according to its annual report. Recipients of Chinese financing – like energy companies or related projects in LAC – may receive direct investments or loans, while governments with problematic currencies may benefit from currency swaps with the Chinese banks. China also has paid to build multiple sports stadiums in LAC as part of its cultural diplomacy.
Its growing presence in LAC energy sectors challenges the traditional market dominance of the U.S., presents vigorous – some say unfair – competition to U.S. business and raises questions about non-China access to current and future supplies of lithium, a strategic metal. It also raises questions for recipient nations, such as the possibility of excess indebtedness, corruption, environmental damage, labor issues and resentment from local manufacturers, who are often excluded from supplying goods and services for multi- billion dollar projects. The Trump administration’s isolationist politics created new opportunities for China in LAC. As the former US administration focused on “making America great again” and imposed import duties on Chinese goods as part of its trade war with Beijing, China has been doubling down on the pace of its strategic investments in LAC, seeking new infrastructure, telecommunications, mining and energy projects – particularly in renewables - across the region.
Growth of electric mobility and energy storage markets increases demand for raw materials used in lithium-ion batteries . Photo: Borges Samuel / Alamy Stock Photo
Over the past 20 years, China has aggressively expanded its energy engagement in the LAC region. Originally driven by economic expansion and a need for raw materials, China’s approach has experienced qualitative transformations in both diplomacy and investments. The Chinese, like any good investor, want to pick projects that will generate profits or produce enough revenue to repay loans, unlike their unfortunate loan-for-oil experience with Venezuela’s national oil company, PDVSA, which owes them tens of billions of dollars. China also invests with a keen focus on developing new markets for Chinese products ranging from solar power plants to electric vehicles.
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China-Latin America: A big push in renewable energy and electric power transmission China’s use of energy has evolved throughout the trajectory of its modern economic development. In the case of fossil fuels, China has been a price taker and technology follower. In modern renewable energy, however, it is poised to play a leading role with the help of government-supported innovation. The Asian country’s record on energy is undeniably mixed: It is the world’s largest consumer of coal and imported oil, but it is also the world’s largest consumer and producer of renewable energy technologies. Internationally, it invests in, finances and owns hydrocarbon and electric power assets, renewable energy projects and critical minerals. China’s growing presence in LAC energy markets is a clear challenge to the U.S. More than 15% of its $58.4 billion in LAC energy outlays from 2000-2019 went to renewables, according to China’s Global Energy Finance database at Boston University.
electric: LAC is an expanding market for Chinese-made solar panels, wind turbines, batteries and electric vehicles. Over the last decades, China has emerged as the leading global actor in key renewable energy sectors: It has become the world’s largest producer, exporter and installer of solar (photovoltaic or PV) panels, wind turbines, batteries and electric vehicles. 7 As an international price war raged among solar cell manufacturers, Chinese solar panel producers struggled with stiff antidumping tariffs in Europe and the U.S., their chief foreign markets. Wind tower manufacturers also faced high tariffs. But Chinese manufacturers found that new markets – free of antidumping tariffs - were open in LAC for all the materials used in both solar and wind projects. Although many of the solar and wind project developers winning auctions in Latin America have been Europeans, all are using low-cost Chinese equipment. By doing so, they can offer highly competitive prices for power purchase agreements (PPAs). Chinese companies supply equipment and Chinese banks provide funding. Even in countries with high currency risks, such as Argentina and Colombia, the CDB provided project finance.
While Beijing clearly does not depend on LAC as a key source of oil, its interest in renewable energy projects is
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In Argentina, for example, CHEXIM financed 85% of a $390 million solar plant in 2019. Latin America thereby benefits from the influx of low-cost, Chinese equipment. This arrangement helped countries like Mexico develop a distributed market without subsidies. For instance, in a 2019 Colombian auction, China’s Trina, one of the largest solar module manufacturers, won 100% of the solar share allocated to the auction (nearly 350 megawatts - MW) at record-low prices, and with PPAs valued in the local currency. Valuing PPAs in Colombian pesos was a risk worth taking for the solar Chinese manufacturer, which will ship millions of panels to Colombia in coming years. China also has been increasing its presence in renewables and electric power. For example, as Latin America’s leader in large-scale solar projects, Chile saw its growth in solar generation hindered by a lack of transmission lines. In 2019, China’s Southern Power Grid purchased a 27.7% stake in Chile’s largest transmission company, Transelec., 8 a move that will help link solar plants to an expanding national grid. Similarly, in late 2020, China’s State Grid Corporation (State Grid) agreed to pay $3 billion to buy control of Compañia General de Electricidad SA (CGE), a Chilean company founded in 1905 that distributes electricity to
2.3 million customers 9 . If this deal obtains regulatory approval, State Grid will control 57% of Chile’s power distribution. In June 2020, State Grid also completed its purchase of Sempra Energy’s 100% stake in Chilquinta Energía, the third-largest distributor of electricity in Chile. In its first advance in Mexico, a subsidiary of China’s State Power Investment Corp. (SPIC) acquired Zuma Energía for an undisclosed amount. Zuma owns wind and solar farms and describes itself as Mexico’s largest renewable power producer. SPIC also has renewable operations in Brazil and Chile.
China made this commitment in Mexico despite the López Obrador government´s move to slow down new private and foreign investments in renewables and strengthen the role of the Comisión Federal de Electricidad (CFE), the state-owned electric utility. 10
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In 2020, Brazil accounted for 60% of State Grid’s investments outside of China. 13 China’s Ultra High Voltage (UHV) transmission technology gives the country an edge in power system projects. This state-of- the-art technology is being used in key Latin American markets by Chinese companies like State Grid. It reduces power losses and can handle intermittent power supplies from renewables better than current systems. Projects installing China’s UHV systems will use Chinese equipment and technology in their construction and operation, as well as Chinese personnel. Confident that storage and electric mobility technologies will achieve economies of scale similar to those of solar and wind, China is positioned to become a major supplier to LAC. Chinese companies are already exporting electric buses, cars, and bicycles to South America even though the technology is still uncompetitive with conventional modes of transportation. Promoting electric mobility through the region gives Chinese manufacturers a head-start. Supported by China’s domestic national subsidy, the international expansion of new grid and energy markets generates significant economic benefits for Chinese enterprises, which can offer high quality,
A pedestrian walks past a branch of State Grid Corporation of China in Yichang city in central China's Hubei province . Photo: Imaginechina Limited / Alamy Stock Photo
State Grid’s investments in Brazil now total $12.4 billion and include Brazil’s largest private energy company, CPFL Energia S.A., which is building the transmission network for the country’s giant Belo Monte hydroelectric plant. 11 State Grid was reported to have plans for a $38 billion investment in Brazil’s transmission and generation infrastructure by 2023.12.
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low-priced equipment abroad. which can offer high quality, low-priced equipment abroad. State Grid reports its return on overseas assets reached more than double digits, approximately three to five times more profitable than the equivalent domestic investments. UHV technology is already widely employed in China, and the country is seeking to advance its UHV technology as a global standard.
Technology, crossing 80 cities on its route from the Amazon to Río, on Brazil’s southeast coast. A prime example of Chinese power technology, this transmission system generated enormous sales of materials and equipment. 14 However, this huge infrastructure project – which was the target of protests - was built in the shadow of the controversial Belo Monte hydroelectric dam. Construction of Belo Monte - the world’s third largest hydroelectric facility– has left scars in the Amazon, the Associated Press reported in December 2019. The dam displaced an estimated 40,000 people, left dry stretches along the Xingu River and caused other environmental damage, drove local fishermen out of business and hurt indigenous communities. China-Latin America and strategic minerals China is already a leader in the mining and extraction of strategic minerals used in components for key technologies such as defense, telecommunications and renewable energy.
In Brazil, for example, State Grid’s construction of the Belo Monte-Río de Janeiro hydropower transmission line promoted the “going out” of China’s UHV technology. This 1,580 mile UHVDC transmission line is the longest in the world, according to Power
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In 2017, the U.S. Department of the Interior issued a list of 35 “critical’ minerals, including bauxite, cobalt, lithium, tin and titanium, all of which are produced in Latin America. Rare earth elements, a category that includes 17 metals, are grouped together in the government’s list as one entry and are essential for a range of high-tech sectors. A mineral-rich country, China has extensive experience extracting minerals used for its industrialization. However, the country is looking overseas to prevent overexploitation of its own resources. The largest Chinese firms producing strategic metals and minerals are also among the largest in the world, and they are moving fast to exploit new reserves in Latin America. Tianqi Lithium and Ganfeng Lithium are two of these companies. Energy storage and electric mobility are the next frontier in energy transition. Components that go into solar, wind and other renewable energy equipment, particularly Li-ion batteries, need critical minerals that abound in the LAC region. According to Benchmark Minerals Intelligence, in 2020 China led the world’s battery cell production with a 63.2% share, while the U.S. was in second place with 14.2% (Figure 1).
Figure 1. Li-ion battery cell global production, 2020 Note: ROW = Rest of World
China’s determination to become the leading supplier of renewable energy technologies has encouraged state-supported companies to make large investments throughout every step in the Li-ion battery supply chain, from mining and processing of minerals, component manufacturing, battery assembly and the export of finished products. No other country in the world has attained such a level of domination in the Li-ion battery value chain (Figure 2).
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 Either commercial or political efforts exist to develop the activity within the jurisdition (some more realistic than others) This map is not intended to be globally comprehensive
Figure 2. Map of significant participation in the current global lithium-ion battery supply chain
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Given the current growth in demand for Li-ion batteries, almost all the raw materials used in battery manufacturing extracted by Chinese companies overseas are sent home for domestic consumption. Finished products, like Chinese electric vehicles, have been shipped to Latin America to demonstrate their performance and green footprint. This is a key part of the country’s efforts to promote their products overseas and develop new markets. Chinese electric buses have been sent to Argentina, Chile, Colombia and Peru. The Chinese electric bus manufacturing company BYD purchased a former Ford car assembly plant in Brazil. 15 Setting up a future manufacturing plant in Brazil makes sense, given the size of the Brazilian market and the government’s growing support for electric vehicles. It also could serve as a base for penetrating other regional markets. BYD already has three other plants operating in Brazil. Chinese companies recently have invested billions of dollars in Latin American lithium mining ventures, principally in Argentina, Brazil, Chile and Bolivia. Ganfeng Lithium, China’s largest lithium compounds producer and a supplier to Tesla, set up a joint venture to mine lithium in the Mexican state of Sonora in 2019. 16 Late last year, Ganfeng exercised an option to increase its share of the Bacanora Lithium project from 22.5% to 50%.
Electric buses from China’s No. 1 electric automobile manufacturer BYD are making test runs in Bogota in an effort to help the capital city of Colombia alleviate air pollution. Photo: New China TV
And in early December 2020, Ganfeng announced it would build a lithium-ion battery recycling plant in Mexico. The plan is to recycle batteries from Tesla cars in the U.S., as well as batteries from Chinese-made electric buses used in South America. 17
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In 2018, China’s Tianqi Lithium committed $4.1 billion to purchase a 24% stake in SQM, a Chilean producer of lithium and derivatives that holds an important share of the world’s lithium reserves 18 Given the size of the lithium deposits, a Chilean economic development agency challenged the sale in court on antitrust grounds, but the court approved the transaction and the project is moving forward. A few Japanese companies also have been buying stakes in lithium projects in Chile and Argentina, but Tianqi’s strategic investment promises to secure its ascendancy in the global lithium market.
Despite political and economic uncertainties in Argentina, Chinese mining companies are investing in promising lithium and solar projects there. 19 One example is China’s Ganfeng Lithium, which increased its stake to 51% in a lithium production operation in Argentina’s northwestern Jujuy Province in 2020. CHEXIM also financed 85% of the Cauchari solar project in Jujuy costing nearly $400 million, at 3% per annum over 15 years, according to Reuters. The province was obliged to buy almost 80% of the solar plant’s equipment from Chinese suppliers, like Huawei Technologies. 20 In 2019, a Chinese consortium won a bid to acquire a 49% stake in a $2.4 billion project to produce lithium in partnership with Bolivian-owned Yacimientos de Litio Bolivianos (YLB). 21 However, a combination of social unrest, political uncertainty and the COVID-19 pandemic could jeopardize the project, or at minimum, cause delays. Another lithium project, between YLB and the German company ACI Systems, was cancelled before President Evo Morales left the country in November 2019. 22 Protesters demanded a battery factory and jobs from the proposed investments.
Click to see enlarged infographic. Stretching across Argentina, Bolivia, and Chile, Latin America's Southern Cone region hosts the world's largest lithium reserves.
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LAC countries with large lithium deposits are pressing to manufacture finished products, like batteries, in addition to supplying raw materials. Countries with wind farms and solar plants say they want to manufacture components for new facilities. But their chances are slim: The region does not have a robust local manufacturing capacity for its growing number of solar and wind projects, much less for lithium batteries. At the same time, China wants to obtain lithium at the lowest possible cost and keep value-added processes at home. Chinese companies will continue to sell their solar panels and wind turbines in LAC – and the rest of the world - as long as possible to maintain jobs in China and earn export revenues. A U.S. expert on mining and minerals said in an interview that U.S. lithium resources are much higher than the government’s published estimates, and called on U.S. companies to increase investment in domestic lithium production. “China has a strategy for investing in lithium, but we’re shortsighted,” said Jesse R. Edmondson, a professional geologist in Alabama who is the founder and CEO of U.S. Critical Minerals, which works in mining exploration and development, and the founder and principal of Critical Resources Consulting.
concern for the rest of the world,” he said. “I don’t worry that we don’t have enough material here, but I do worry that if we don’t invest in domestic lithium, we could be at the mercy of China’s battery manufacturing industry.” The U.S. Government response to China’s strategic mineral engagement China’s investment in stronger diplomatic relations and financial investments in LAC countries benefit the Chinese government as they translate into jobs, regional goodwill and new sources of essential minerals and revenue. However, the growing commercial influence of China in Latin America has implications for US-LAC relations. The Western Hemisphere, for the most part, has been aligned to the United States for decades, and LAC countries consider the U.S. an important trading partner. However, U.S. investments in Latin America, particularly in the mining of critical minerals, have been dormant lately, and aggressive Chinese investors have moved in to fill the vacuum.
China’s big push to obtain more lithium mining assets in LAC “is a concern for the U.S. and should be a
To counteract China’s dominance in the critical minerals supply chain, President Trump issued an
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executive order in 2017 creating a U.S. strategy that would ensure secure and reliable supplies of critical minerals. The plan, which includes recommendations and action items to reduce the United States’ “vulnerability to disruptions in the supply of critical minerals.” Actions include finding ways to reduce or eliminate the use of cobalt in Lithium batteries, recycle and recover components, improve manufacturing efficiency and promote sustainable mining in the United States. 23 The U.S. strategy also called for increased cooperation with allied countries, particularly with Canada and Mexico. New investments in the Western Hemisphere’s mining sector, as well as cooperation with allies like Western Europe, Japan and South Korea, form part of the effort to counterbalance China’s dominant role in critical minerals. In 2019, the U.S. State Department created the Energy Resource Governance Initiative to help allied countries mine critical minerals sustainably. 24 Peru is a founding partner of the initiative, and Argentina and Brazil are participants. The program promotes sustainable mining through a roadmap and toolkit that includes best practices and lessons learned.
2020. 25 América Crece is “an innovative, whole-of- government approach to support economic development by catalyzing private sector investment in energy and other infrastructure projects across Latin America and the Caribbean,” 26 according to the U.S. State Department. It aims to support economic development through job creation and infrastructure projects in the LAC region. The initiative was developed after the U.S. government realized that LAC suffers from a severe shortfall in infrastructure investment. The region needs between $100 billion and $150 billion in new annual infrastructure investment to help spur economic growth and meet the needs of burgeoning populations. At first, América Crece focused mainly on energy sector infrastructure. However, China’s investments in the region – including BRI outlays - cover energy infrastructure, telecommunications, ports, highways, and airports. As a result, América Crece moved to cover those areas as well, with emphasis on energy infrastructure. According to the U.S. State Department, América Crece will initially focus on Central America, at the risk of missing opportunities in other areas like South America, where China is very active.
Another U.S. initiative is América Crece (Growth in the Americas), which was officially launched in September
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The Biden Administration and China-LAC relations: What to do? The Biden administration is facing a LAC region devastated by COVID-19, with its countries facing the biggest economic contraction in their modern history. The IMF is predicting an overall GDP contraction of 8.1% in 2020 and a recovery of 3.6% in 2021. But it expects that most economies will not return to pre- pandemic growth until 2023. 27
Although yet to be fully defined, the new Biden administration’s prospective policies on engagement in Latin America and the scope of China’s role, will likely revert in many ways to what may be described as the status quo under Obama, which stressed policies of multilateralism and enhanced trade. 28 It also bears mentioning that during his eight years as Vice President, Biden was the Obama administration’s de facto Special Envoy for Latin American and the Caribbean. He traveled to the region more than a dozen times and paid particular attention to issues in Central America and the Caribbean. The Biden administration’s hemispheric plan will center around the expansion of foreign aid, mobilization/facilitation of private investment, anti- corruption and poverty reduction with a specific focus on women in the region. 29 This presents a unique opportunity for the incoming administration to encourage expanded regional cooperation in LAC in close collaboration with its traditional democratic allies (including Canada, Japan, the EU and UK) on these and other issues as a strategic counterweight to China. For LAC, Biden also plans to send aid to areas like Honduras, Guatemala and El Salvador – the Northern Triangle – in an effort to ease the poverty and violence that encourages migration. Again, these challenges will
Trade between China and Latin America grew 19% year-over-year in 2019, to $307.4 billion, according to Fitch Solutions. China is Latin America’s second-largest trading partner, after the U.S.
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be more effectively addressed through expanded multilateralism and greater regional cooperation with neighboring Mexico. As for Biden’s prospective Latin American energy engagement, recalling Obama era policies, there appears to be a strong inclination to support increased investments in renewables. Biden has also signaled that his administration will re-enter the Paris Agreement on day one and likely convene a global climate summit in the first 100 days. 30 Biden will re- commit the United States to the climate change battle as underscored by his cabinet appointments, particularly that of John Kerry, as the first-ever special presidential envoy for climate. The climate focus could translate into a direct and specific engagement with Brazil about deforestation in the Amazon. 31 As a possible counterweight to China, Biden proposes an investment strategy as part of his current climate plan. This proposed blueprint emphasizes “clean energy and resilient and sustainable infrastructure” that will subsequently “drive an innovation boom that helps us achieve the vision of a hemisphere that is secure, middle class, and democratic from Canada to Chile.” 32 Engaging in this strategy includes supporting well-integrated power grids from Mexico through Central America to Colombia, generated by clean
energy sources. Furthermore, Biden encourages clean energy transitions and climate change adaptations for regions that experience severe weather conditions and patterns, such as the Caribbean and the Northern Triangle. 33 These plans, while ambitious, are attainable by helping to spur greater U.S. private sector investment in the region. The Biden administration will also use the Clean Energy Export and Climate Investment Initiative, which provides low-cost financing to small island nations in the Pacific and Caribbean that are prospective leaders in combating the climate crisis. 34 Regarding direct engagement with China, Biden will attempt to “rally a united front” to hold China “accountable to high environmental standards in its BRI infrastructure projects, so that China cannot outsource pollution to other countries.” 35 More concrete actions include the following: constructing U.S.-China bilateral agreements on carbon mitigation, fostering a G20 commitment to “end all export finance subsidies of high-carbon projects,” presenting countries involved in the BRI with alternative sources of development financing for “lower-carbon energy investments” and “reform[ing] the International Monetary Fund and regional development bank standards on debt repayment priorities for
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development projects.” The goal is to increase the costs and risks of projects that generate high carbon impacts and high indebtedness. 36 Closer to home, the Biden Administration would be well served to promote a more competitive North American economy, working closely with its USMCA partners, Canada and Mexico. On the energy front, the governments of the U. S., Canada and Mexico should work together to revive the North American Climate, Clean Energy, and Environment Partnership launched in 2016 37 and an updated North American strategy to advance renewable and low-carbon energy technologies. This should include efforts to expand the level of cross-border electricity trade and infrastructure investment. Closer cross-border cooperation on electrical transmission is needed not just to promote greater energy security, but also to plan against potentially catastrophic threats, ranging from system failures to cyber-attacks. 38 China’s Oil & Gas investments in LAC It is commonly viewed that Beijing has looked beyond its borders to invest in oil exploration and production largely to satisfy its surging domestic demand for energy. Demand for oil clearly has burgeoned since the
country’s 1978 economic reforms and its opening up to the international community and foreign investment. Beijing’s “going-out strategy” only accelerated as China became the world’s largest energy consumer in 2010. Over the past two decades, Russia, Central Asia, the Middle East, Africa and Latin America have all provided China with petroleum. But beyond its need to satisfy domestic demand, China – since 2017 the world’s largest importer of crude oil - also has invested in overseas oil projects to mitigate its vulnerability to tumultuous oil prices and to reduce its reliance on unstable regional supplies. 39 In sum, Beijing has made a concerted effort to enhance energy security and diversification of supplies and sources.
China uses loan-for-oil exchanges to meet its domestic energy demand and guarantee debt repayment. Photo: Bilfinger SE via Flickr
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CNPC made its first investment overseas and its first in Latin America in 1993, according to the company. That year, CNPC won the tender to develop a block of Peru’s Talara oilfield, a marginal field that had been in production for over 100 years, with most of its wells shut-in. Successful with its first effort, CNPC developed another block in Peru, later moving on to make multi-billion- dollar investments and loans for oil projects throughout Latin America, principally South America. Aside from CNPC, three other giant, government-owned energy companies are also operating in LAC: China National Offshore Oil Corp. (CNOOC), China Petroleum and Chemical Corp. (SINOPEC) and SINOCHEM, which works in chemicals, fertilizer and oil. BRAZIL: China’s investments to date in Brazil have reached $38.9 billion, or 80.5% of the total invested in LAC oil projects. The CBD negotiates with Brazilian SOEs – especially Petrobras (Petróleo Brasileiro S.A.) – seeking to align its loans with the Brazilian government’s economic priorities, such as supporting domestic industries working in the oil patch and building local supply chains for the oil industry.
guarantee debt repayment. In 2009, China signed a $10 billion, long-term, loan-for-oil program with Brazil’s Petrobras to guarantee a supply of 200,000 barrels per day (b/d) of crude. Since then, Petrobras has worked out other agreements, such as the pre-payment of some multi-billion-dollar loans with the CDB, freeing it from the obligation of a preferential supply obligation covering 100,000 b/d of oil equivalent. 40 Brazil currently is the leading Latin American supplier of crude to China, followed by Colombia and Venezuela. In 2019, Brazil shipped 803,000 b/d to China, Colombia 262,000 b/d and Venezuela 228,000 b/d, according to the U.S. Energy Information Administration (EIA). China in 2019 imported an average of 10.1 million b/d of crude, up about 9% from 2018, the EIA reported. China has invested in a wide range of Brazilian oil and gas exploration projects, as well as joint ventures in pipeline construction and oil production infrastructure. 41 For example, CNPC and CNOOC are part of a world-class oil project in Brazil. Each holds a 10% share in the consortium that is developing Libra, the super-giant, deep water, pre-salt oil field estimated to hold between 8-12 billion barrels of recoverable reserves.
China uses loan-for-oil arrangements in oil-producing nations, betting that countries’ oil production will
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Companies (PDVSA) – possesses the world’s largest proven oil reserves.
Starting around 2007, the CDB signed oil-for-loan agreements with Venezuelan President Hugo Chávez and PDVSA. But under the Chávez government (which assumed office in 1999) and the administration of President Nicolás Maduro, which took over after Chávez died in 2013, Venezuela’s oil industry sank into disarray, becoming a center of inefficiency and corruption for government officials and their friends. The Chávez government fired competent PDVSA executives, politicized the company, failed to make investments in maintenance and presided over the management, deficient maintenance and periodic national power outages, Venezuela’s oil production fell to 929,000 b/d in 2019, from about 3.5 million b/d in 2000. OPEC reported that Venezuelan oil production averaged 340,000 b/d in August 2020. Venezuela fell behind in its oil deliveries and loan repayments to China as PDVSA went into decline and production slumped. The Trump administration began applying increasing layers of sanctions on Venezuela several years ago, and in 2019 halted PDVSA’s ability to export directly oil dismantling of a once-efficient and profitable international enterprise. As a result of poor
Entrance to PDVSA Headquarters in Caracas. Photo : Wikipedia Commons, Wilfredor.
VENEZUELA: C h ina had high hopes when it signed a “strategic development partnership” in 2001 with Venezuela, then headed by leftist President Hugo Chávez. The agreement ushered in a period of new bilateral trade, Chinese investments and big loans covering oil, mining, infrastructure and other areas. Both were socialist countries, and both had complementary economies. China needed (and still needs) imported oil, and Venezuela – which previously had one of the world’s most efficient National Oil
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to China. Only in December 2020 did Venezuela resume direct shipments of crude to the Chinese. 42
imported oil and only a small fraction of its imported coal and natural gas. 45
One reason for this is the high cost of shipping crude from Latin America to mainland China. China’s primary source of imported oil is seaborne, mostly from the Middle East. As a result, it is probably more accurate to describe Beijing’s investments in LAC oil exploration and production as a means to diversify oil supplies, explore and enter new markets and partner with foreign GUYANA: China has invested in a variety of oil, mineral, timber and infrastructure projects in Venezuela’s economically poor but resource-rich eastern neighbor. The largest, by far, is in oil. CNOOC holds a 25% interest in a consortium developing the Stabroek offshore block, a $9 billion project which covers 6.6 million acres and contains estimated recoverable reserves of more than 8 billion barrels of oil equivalent (boe). ExxonMobil, the project operator, has 45% of shares and Hess 30% in Stabroek, which began producing in December 2019. corporations, which can open the door to new technology and new business in oil and gas.
Since 2007, the CDB and CHEXIM have loaned Venezuela $62.2 billion, according to figures from the Inter-American Dialogue and the Global China Initiative at Boston University’s Global Development Policy Center. About $50 billion of that total reportedly involves debt owed under oil-for-loan agreements. Reuters reported in August 2020 that the Venezuelan government had negotiated a grace period with China for $19 billion in debt, ending at year-end. 43 Indeed, over the past 20 years, LAC countries have contributed increasingly to China’s oil imports, growing from 2% in 2005 to more than 13% in 2008. 44 But despite China’s domestic concerns over energy security, the role of LAC as an oil supplier is small. Even after over two decades of Chinese operations in the region, Latin America provides less than 10% of China’s
ExxonMobil announced its first crude discovery in the offshore field in 2015, propelling Guyana into the club
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Challenges for China and its Latin America partners in energy Since 2000, the scope of Chinese investment, trade, and loans in the LAC region has, except for the last few years, expanded significantly. By 2013, Chinese policy bank loans had already surpassed the financial backing provided by Latin America’s long-established multilateral partners, such as the Inter-American Development Bank and World Bank. 48 LAC political leaders generally have displayed enthusiasm for China’s contribution to regional development. Highly-indebted governments with elevated country risk and limited access to the international banking system can obtain loans from China, often at attractive interest rates. And Venezuela can eschew the onerous conditions set by international financial institutions. Chinese financing can fill holes in national budgets, while governments claim credit for energy and infrastructure projects that can improve their economies and the lives of their citizens. But China’s expanding economic role is not without criticism. Chinese manufacturers provide strong competition for Latin America’s industrial sector as they develop new projects, and many critics argue that China’s increased footprint may lead to the “re- prioritization” of the region’s economy, eroding
of world-class oil states and raising prospects for massive new oil revenues.
In the mining sector, China’s Bosai Minerals produces bauxite and owns a manganese mine, which was shut down in 2019 after two miners died and several others became ill while working the Matthew’s Ridge mine. A Guyanese news outlet, newsroom.gy, recently reported that the manganese mine will begin producing later this year. In the article, Guyana’s Minister of Labor said that Guyanese employees should receive the same pay as Chinese expat workers. 46 China’s relationship with Guyana goes back to 1972 (“a now defunct brick factory”) and covers a range of investments, loans and grants, said Jared Ward, an expert on China and its ties with the Caribbean in a 2020 article published in The Global Americans. But important Chinese projects have been delayed by controversies, like environmental concerns, political differences and the issue of worker equality. Currently the China-Guyana relationship looks like a “potential ‘win-win’ for both countries,” Ward said. “But for all the good that comes out of this partnership, there’s risk allowing China, and its mixed environmental record, unfettered access to Guyana’s natural resources.” 47
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advances made in the environment, labor and human rights in favor of more profitable business conditions for Chinese companies. 49 The presence of China in major projects also raises questions about accumulating excess debt, promoting corruption, governance and potential environmental damage.
development and obtain up to $2.8 billion for new projects.
A debt trap and hidden debt - A global financial quandary
Repayment terms for credits from the CDB and CHEXIM are not available to outsiders, and are essentially secrets shared by the Chinese lending banks and the LAC government agencies receiving the loans. Governments and SOEs in the region may be walking into a debt trap – adding unsustainable levels of new indebtedness to their already tenuous fiscal position. Since outsiders have no idea about repayments terms and related issues, it’s impossible to determine if debt is accumulating too rapidly, as in the case of Venezuela. In a dramatic move, Ecuador recently signed an agreement with the U.S. International Development Finance Corp. (DFC) that would reduce its debt to China, exclude Chinese telecom companies from participating in Ecuador’s 5G mobile network
Under the framework agreement, the DFC will work “with private-sector financial institutions to help create a special purchase vehicle that will buy oil and infrastructure assets in Ecuador,” the Financial Times (FT) said. 50 Proceeds of these sales will be used to pay Chinese debt ahead of schedule and provide up to $2.8 billion for new projects. Ecuador’s outstanding debt to China will be $3.5 billion after a scheduled payment is made, the newspaper said.
One of the stipulations of the accord requires Ecuador to sign the Trump administration’s “Clean Network”
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initiative, which obliges signatories to exclude purchasing Chinese systems and equipment (like Huawei) as they develop 5G mobile networks. Adam Boehler, the Development Finance Corp.’s CEO, told the FT that the agreement represents “‘a novel model’ to eject China from the Latin American nation.” The U.S. government expects to use the Ecuador agreement as a model, encouraging other countries to reduce their dependence on Chinese debt and exclude Chinese telecoms from their networks. According to figures from the Inter-American Dialogue and the Global China Initiative at Boston University’s Global Development Policy Center, as of 2019, loans made by the CDB and CHEXIM to LAC governments and SOE’s looked like the data in Figure 3. These loans cover energy and other sectors. They do not take into account the hidden debt described by the article presented below. In an article published last year by the Harvard Business Review ( How Much Money Does the World Owe China? ), the authors stated that 50% of China’s loans to developing countries are not reported and do not appear in the data banks of the World Bank, the IMF or credit-rating agencies. 51
The Chinese government and its subsidiaries, they said, have loaned about $1.5 trillion to more than 150 countries, making China “the world’s largest official creditor – surpassing traditional, official lenders such as the World Bank, the IMF or all OECD creditor governments combined.” What this means is that, in reality, debt owed by developing nations to China is greater than 5% of global GDP. Moreover, they said: “For the 50 main developing country recipients, we estimate that the average stock of debt owed to China has increased from less than 1% of debtor country GDP in 2005 to more than 15% in 2017.” Some of these countries (none in Latin America) owe at least 20% of their GDP to China. And China is owed money beyond the developing world. Adding other indebtedness known to the public, including the $1 trillion in U.S. Treasury debt held by China’s central bank and international trade credits, the total owed to China reaches $5 trillion, or more than 6% of world GDP as of 2017. What all this means is that governments and private financial institutions cannot properly assess a country’s real repayment burdens and financial risk, the article says. The private sector will misprice bonds and other debt instruments. Many Chinese official loans have