June 22, 2005

CHINESE ENERGY STRATEGY IN LATIN AMERICA

By Chietigj Bajpaee


Latin America is fast emerging as the major stage of competition for oil and gas resources among the global powers. The region, which has traditionally come under the U.S. “sphere of influence,” caught the attention of China following the significant growth potential of its energy resources. Latin America is estimated to hold 13.5 percent of the world’s proven oil reserves but accounts for only 6 percent of total output. Although China has tapped energy resources in Venezuela, Columbia, Ecuador and Peru, and has begun to tap Argentina and Bolivia, there still exists significant room for expansion, especially given that China still depends on the Middle East for 60 percent of its oil imports and wishes to further diversify.

China’s domestic energy needs and regional developments in the Asia Pacific region are likely to fuel Beijing’s desire to access Latin American energy resources. China, which has been a net oil importer since 1993, is the world's number two oil consumer after the U.S., importing one third of its crude oil consumption. In the presence of sporadic power shortages, growing car ownership, cross-country air travel, and the importance of energy to maintain China’s burgeoning growth rates, pressure is mounting on China to access energy resources on the world stage. Furthermore, China’s limited progress in accessing local energy resources due to poor relations with neighboring states (witness the Sino-Japanese dispute over the energy-rich East China Sea, the disputed status of the Spratly and Paracel islands and growing political instabilities in Central Asia) have forced China to search for energy further afield. However, China's growing presence on the international energy stage could ultimately bring it into confrontation with the world's largest energy consumer, the U.S. Nowhere is the Sino-U.S. energy competition more evident than in the United States’ backyard.

The competition for energy resources in Latin America is unlikely to be confined to the economic sphere as seen by developments in other regions where China is attempting to access energy resources. For example, China’s military cooperation with Myanmar, Sudan and the Central Asian republics cannot be separated from its attempts to access energy resources in these states. While not a zero-sum game, growing interlinkages and interdependence between China and Latin America is likely to come at the cost of the United States’ relations with its neighbors, which will only undermine U.S. ability to access the region’s energy resources. This will force the U.S. to rely on energy resources from more remote and less stable regions, such as West Africa, the Caspian and the Middle East.

Entering the U.S. “Sphere of Influence”

As the world’s number five crude exporter with the largest proven oil reserves in the Western hemisphere, Venezuela is emerging as a major prize in the competition for energy resources in Latin America. While Venezuela sells 60 percent of its crude oil exports to the U.S. and is the United States’ fourth largest oil supplier, Venezuelan President Hugo Chavez is attempting to reduce his country’s dependence on the U.S. market. President Chavez has stated that "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." [1] Easier said than done, as China’s refineries will have to be refitted to process Venezuela’s heavy crude oil. Furthermore, transporting energy resources from Venezuela and Argentina is particularly difficult given that both states are on South America’s Atlantic coast although there have been discussions to overcome this by constructing a pipeline from the Atlantic to the Pacific through Panama. [2]

Nevertheless, China has made significant inroads in accessing Venezuela’s energy resources. During Venezuelan President Hugo Chavez's visit to Beijing in December and Chinese Vice President Zeng Qinghong's visit to Venezuela in January 2005, China committed to develop Venezuela’s energy infrastructure by investing $350 million in 15 oil fields, $60 million in a gas project as well as upgrading the country’s railway and refinery infrastructure. In exchange, China will get 100,000 barrels of oil a day, 3 million tones of fuel oil a year and 1.8 million tones of Orimulsion, an alternative boiler fuel from Venezuela. China National Petroleum Corporation (CNPC) has also been given significant oil and gas development opportunities in Venezuela including the fields at Zumano in eastern Venezuela, which has an estimated 400 million barrels of oil.

Apart from Venezuela, China has made significant progress in tapping the energy resources of numerous other Latin American states. While attending the annual meeting of the Asian-Pacific Economic Cooperation (APEC) conference in Chile in November 2004, Chinese President Hu Jintao announced a $10 billion energy deal with Brazil for investments in energy and transport infrastructure over two years. This supplements plans for a $1.3 billion deal between China’s Sinopec (China Petroleum & Chemical Corporation) and Brazil’s Petrobras for a 2,000 kilometer natural gas pipeline. China is also acquiring oil assets in Ecuador as well as investing $5 billion in offshore petroleum projects in Argentina over the next five years. During Chinese Vice President Zeng Qinghong's visit to Latin America in January, he also signed an oil exploration agreement with Peru.

Latin America’s increasingly symbiotic relationship with China is not limited to energy. Progress in trade, investment, and political and military cooperation reinforce cooperation in the energy sphere. China has increasingly purchased raw materials from Latin America to meet its consumption and growth needs in exchange for Chinese investment in Latin America’s infrastructure. While the United States has traditionally looked to Latin America as its source of numerous raw materials and a market for its finished products, China is fast replacing the United States in these roles. China buys vast quantities of iron ore, bauxite, soybeans, timber, zinc and manganese from Brazil while looking to Bolivia for tin and Chile for copper. In 2004, China displaced the U.S. as the leading market for Chilean exports while becoming Brazil's second-largest trading partner in 2003. China is the world’s largest consumer of copper, with Chile accounting for more than 40 percent of its copper imports.

During Chinese President Hu Jintao’s visit to Latin America in November 2004, he also secured “market economy” status from Brazil, Argentina and Chile in exchange for pledging to invest $100 billion in Latin America over the next decade as well as reducing restrictions on the access of Latin American products to the Chinese market. In January, Chilean and Chinese trade officials also began discussions on a free trade agreement in Beijing, while Brazil is also pushing for the creation of a free trade area with China. Chinese investment into Argentina has been especially welcome as it comes in the wake of Argentina's devastating economic crisis three years ago.

These growing linkages have also resulted in a strengthening of political relations. It is no secret that a growing number of Latin American states with left-leaning regimes hold hostile views of the U.S. Hugo Chavez’s Venezuela and Fidel Castro’s Cuba have been open in condemning U.S. foreign policy. Venezuela has raised taxes on foreign oil and gas companies operating in Venezuela, such as ExxonMobil. Argentinean President Néstor Kirchner called for a boycott of the Royal Dutch/Shell Group's Argentine affiliate to protest a gasoline price increase, which forced Shell to back away from its price increases. Even Mexico appears to be distancing itself from the U.S., with Mexico City's popular left-wing mayor, Andrés Manuel López Obrador, gaining popularity ahead of Mexico's July 2006 presidential election. Many Latin American states also opposed Washington’s candidate for the head of the Organization of American States and elected José Miguel Insulza, a leftist from Chile.

Bolivia’s Congress recently approved a new energy law that increases taxes on foreign companies accessing its oil and gas reserves while street protesters have called for a nationalization of Bolvia’s hydrocarbon reserves, which culminated in the resignation of U.S.-backed pro-free market President Carlos Mesa. Elections will be held within the next six months and Evo Morales; an anti-US leader of the Movement Towards Socialism party has emerged as a strong contender for the presidency.

Brazilian President Luiz Inácio Lula da Silva has also tried to distance himself from U.S. influence to emerge as a leader of the developing World, as seen with the G33 bloc at the World Trade Organization, and Brazil’s bid for a permanent seat on the UN Security Council. President da Silva has also backtracked on the U.S.-backed Free Trade Agreement of the Americas (FTAA) while favoring a “strategic alliance” with China, India and other developing countries in order to enhance south-south cooperation. Finally, Peru and China also have strong relations with diplomatic ties going back 150 years and Peru having the largest Chinese immigrant population in South America.

China's growing energy interests in the Americas have been accompanied by a growing involvement in the region's security. In October, in its first military deployment to Latin America, China sent a UN peacekeeping contingent to Haiti comprising 140 Chinese policemen with plans to deploy an additional 125 personnel. Ironically, Haiti is one of only 25 states that recognize Taiwan rather than China. Recently, the issue of extending the mandate of the 6,000-strong UN Stabilization Mission in Haiti (MINUSTAH), which is due to expire in June, has come under pressure from Sino-Taiwanese frictions. While UN Secretary General Kofi Annan and the interim government of Haiti have asked that the mandate be extended by one year in order to oversee the municipal, legislative and Presidential elections to be held later this year, China is pushing for only a six month extension due to a scheduled visit by interim Haitian President Alexendre Boniface to Taiwan in July. While having to accept the humiliation of aiding a state that engages in relations with Taiwan’s “secessionist” forces, China has garnered the goodwill of Latin American states, which will come in handy when negotiating energy and other deals.

The U.S. is looking on with caution as China encroaches upon a region that has traditionally been a major supplier of energy resources. Venezuela and Canada together provide the U.S. with a third of its energy imports. For every barrel of oil that China purchases from Latin America there is potentially one less barrel available for the U.S. Furthermore, as the American states reduce their reliance on the U.S. oil market, they will have greater political leverage over the U.S. on contentious issues such as Canadian trade disputes with the U.S. over lumber and beef, and tensions over human rights abuses in Venezuela.

Finally, the competition for energy resources in Latin America is not limited to the U.S. and China. In October 2004, several oil companies including China’s PetroChina and India’s ONGC (Oil and Natural Gas Corporation) were looking into acquiring oil assets valued at $1.5 billion in Ecuador. Japan and South Korea are also stepping up efforts to secure raw materials in Latin America. Japanese Prime Minister Junichiro Koizumi visited Brazil in September 2004 and South Korean President Roh Moo Hyun also made trips to Argentina, Brazil and Chile in 2004.

Setting the Stage for an Energy “Cold War”

Friction between China and the U.S. has so far focused on the question of China's undervalued exchange rate, its human rights record, relations with “rogue” states and the issue of Taiwan. However, the competition over energy resources is now becoming an additional area of contention. While China and the U.S. have launched the U.S.-China Energy Policy Dialogue, both states are also engaged in a competition for energy resources in Russia, the Caspian, the Middle East, Africa and the Americas. This competition could foreseeably combine with other areas of friction. For example, if the U.S. were to side with Japan on its territorial dispute in the potentially oil and gas rich East China Sea or support India over China in meeting its growing energy needs, strategic blocs or alliances could form in the international energy arena. Latin America is likely to emerge as a major stage of this energy competition or confrontation.

Notes:
1. Luft, Gal, “In search of crude China goes to the Americas,” Institute for the Analysis of Global Security: Energy Security, January 18, 2005, http://www.iags.org/n0118041.htm.
2. Cheung, Ray, “Barriers in the way of tapping S American oil and gas,” South China Morning Post, November 21, 2004.

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