Latin American Oil: Beijing Still Lending, But for How Long? – I’m quoted by Energy Compass

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Last week, Energy Intelligence (EI) quoted me on China’s continued appetite for oil and gas investments in Latin America even with its own  economic slowdown and LatAm’s many political upheavals. (Sincere thanks to EI for a PDF of their proprietary Energy Compass to share on my blog. You can access it below here.)

Some thoughts on China’s strategy: In the case of Venezuela, as the price of oil fell, Beijing quickly eased up on PDVSA’s repayment terms for its huge outstanding loans which are repayable in oil. This shows some willingness to help Venezuela cope with the falling market value of oil. Why? Because, mainly, it is the oil that China has always been laser-focused on – not making interest on these loans.

Generally, it is clear that new Chinese investments or loans are still possible in Latin America. In Venezuela however, Chinese oil investments have fallen way behind initial expectations (viz: in 2007 Venezuela was expected to soon have Beijing’s largest investments anywhere in the world). Nevertheless, chavista ineptitude has meant that three other Latin American countries have since gotten more total energy investments than Venezuela  (i.e., Argentina, Brazil and even Cuba) – even North America by now has more. Much of this was due to Beijing being cash-rich after the big 2008 downturn, and it quickly made these investments. Today, there is somewhat of a similar interest by China in Latin America, although with nothing like the buying spree of 2010 – 2012 possible.

Almost a decade ago, Chinese companies already had a ‘hard-nosed’, even self-defeating, reputation in its energy contract negotiations with PDVSA.  Certainly, any investments that could be made there in the present atmosphere of Venezuela’s daily slow-motion political, economic and social disintegration would be very tightly controlled, insuring they are narrowly targeted to productive projects.

However, given low oil prices and the extremely poor state of PDVSA’s managerial capacities, China has in recent times shown solidarity with all other major foreign firms working in Venezuela in demanding major reforms in contract terms for oil-sector joint projects as well as concessions granting Chinese and other foreign firms operational control of fields as prerequisites to risking any new cash in the Faja Orinoco or elsewhere.

This had already been the general trend for several years now by all the international oil companies (IOCs), not just the Chinese, still partnering with PDVSA in producing oil. (Caveat: Russia’s Rosneft, while in accord on wanting these changes,has had a strategy of investing, as  I wrote in Americas Quarterly recently,.)  Long before the oil price fell, (as I’ve written here before) Bejing had already lost confidence in the managerial capacity and any commitments made by Chavez or his chavista administration.  This loss of respect dates from at least early 2008.

Even though Russian firms led by Igor Sechin today produce more oil than Chinese firms, Beijing’s long-term involvement will continue until Maduro et al finally leave office and the present opposition takes control of the country.  Why?  Let me answer with an anecdote:

One day, in 2008, I was at CNPC headquarters in Caracas just before a Chinese minister was to arrive from Beijing. All the secretaries, managers and engineers went to line up outside in front with hand-made signs to welcome the minister (this is a Chinese-corporate custom).  I asked one smiling engineer “Why are you guys still here if you have so many problems with PDVSA?” He smiled, leaned over and whispered in my ear “Reserves! Nowhere else in the world are there so large undeveloped reserves!”

As the country now collapses in slow motion, that long-term logic remains operative if not particularly productive. Here is the Energy Intelligence piece: 

 

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