By Matthew Hughes
As part of Chinaโs โenergy diplomacyโ to โsecure long-term access to energy resources,โ most of its investments in Latin America have been in resources and energy,[1] especially among the regionโs hydrocarbon giants Brazil (which produced 3.67 million BPD of petroleum and other liquids in 2019), Mexico (1.92 million BPD), and Venezuela (0.93 million BPD). Chinaโs incursion into this sector, characterized as such for considerable extraction and importation of hydrocarbons, loans for infrastructure projects, and acquisition of energy companies by Chinese state-owned enterprises, generates benefits and costs for the regionโs hydrocarbon giants. Chinese engagement in Brazilโs energy sector has fostered infrastructure development but threatens Brazilโs control over its energy resources and companies. In Mexico, infrastructure loans from Chinese banks have enabled struggling projects to move forward, but at the expense of exceeding cost estimates. Home to the largest oil reserves in the world, Venezuela has been a prime target for Chinese energy engagement through trade and lending, but this activity has yielded an unsustainable borrowing model from which Venezuela struggles to escape.
Chinese bank loans, largely unfettered by time constraints or attached conditions, provide an alternative to traditional multilateral institutions that often establish conditionality for loan provision. Although this offers some short-term benefits, there is a greater risk of irresponsible borrowing, which carries costly consequences. Chinese trade and investment provide regional hydrocarbon giants with short-term gains like capital to maintain growth momentum, but Chinese engagement in the energy sector should concern these three countriesโ governments because the unconditionality of Chinese loans and their own unsustainable borrowing foster debt distress.
Chinaโs heavy engagement in Brazilโs electricity sector and gradually increasing participation in oil extraction have benefitted the countryโs development but present risks and vulnerabilities in critical infrastructure. Chinese state-owned enterprises currently own 23.4GW of installed capacity in Brazil across energy generation projects. Since their entry into Brazilโs electricity sector in 2010, Chinese companies, most of them state-owned, have acquired 10 percent of Brazilโs generation, 12 percent of its transmission, and 12 percent of its distribution segment by 2019. Chinaโs State Grid, which controls CPFL Energia, Brazilโs second-largest power distribution company, is a major player in Brazilโs power transmission auctions and plans to invest around $2.8 billion by 2025. China has installed considerable capacity in renewable energy, and Brazil stands to benefit further from Chinese investments in wind and solar power. Although this has improved Brazilโs development and granted more Brazilians access to electricity, foreign ownership in this sector threatens critical infrastructure in the event of economic coercion or, although less likely, a conflict.
China also has stakes in Brazilโs oil extraction, which increased with Chinese state-owned firms winning rights to develop the pre-salt Libra field in 2013.[2] Chinese investors are aware of Brazilโs shaky past and uncertain future regarding the regulation of foreign participation in oil ventures, and they have increased their stakes with restraint.[3] This trend does not present much concern for Brazil or the US (other foreign companies have even greater stakes in Libra and other fields). However, Brazilโs record of auctioning fields to foreign companies with deep pockets of state-backed funds ensures that Chinese state-owned companies will secure a greater foothold in Brazilโs oil sector over time, barring significant changes in regulatory conditions.
In Mexico, Chinese infrastructure loans have provided much-needed capital to promote energy sector growth and investment in renewables, but this lending practice with long-term horizons and without transparent conditions may encourage the Mexican government to โspend without boundsโ and generate perpetual debt. Chinaโs involvement in the energy sector grew during the tenure of former President Enrique Peรฑa Nieto with the $5 billion SINOMEX Energy Fund, established by Mexicoโs state-owned oil and gas firm Pemex and Chinaโs National Petroleum Corporation, the China Development Bank (CDB), and the Industrial and Commercial Bank of China (ICB).This has provided short-term benefits, including a $600 million loan for the construction of the Dos Bocas refinery in Tabasco.This initiative, a manifestation of President Andrรฉs Manuel Lรณpez Obradorโs (AMLO) commitment to oil investment in his home state, filled a gap for capital in the Dos Bocas refinery construction project, which has already exceeded its $8 billion budget by $918 million. Chinese banksโ unconditionality provides Mexico with an alternative to multilateral lending institutions that stipulate social responsibility. The International Monetary Fund called upon AMLO to put construction on hold to โmake funds available to boost pandemic-related fiscal support,โ but he refused to heed.
Irresponsible borrowing bears the implication that China could exert economic pressure on Mexico to discourage policies that China perceives to be violating its core interests. A recent example involved Guyanaโs agreement with the Ministry of Foreign Affairs in Taipei to open a Taiwan representative office in Guyana, in violation of Chinaโs โOne-China Principle.โ China allegedly pressured Guyana to back out of the agreement by using its economic leverage in infrastructure financing (China has financed an airport, convention center, and major infrastructure projects) and bilateral trade (which totaled $319 million in 2019).
Chinese state-owned companies are also entering Mexicoโs renewable energy sector with great force, even though renewables have lost momentum under AMLO. Chinaโs State Power Investment Corp recently acquired Zuma Energia, Mexicoโs leading independent renewables company, for an undisclosed sum. China may soon lead renewables development in Mexico given the countryโs strong prospects for wind and solar and its need for capital, depending on the Mexican regulatory environment. Chinese investment can help Mexico to gain much-needed energy diversification, but foreign development loans or stakes in renewables could lead to debt distress, as has been the case with Venezuelaโs oil sector.
In the case of Venezuela, Chinaโs unsustainable debt model is harming the borrower and lender. As the CDBโs largest foreign borrower,[4] Venezuela still owes at least $23 billion to China for loans provided to resource- and energy-related projects in the last 15 years. This relationship has enabled Venezuela to export to a trading partner with similar ideologies, but Venezuela struggles to escape from exorbitant debt, which exacerbates its precarious economic conditions that in turn affects the region. As part of Chinaโs strategy to secure long-term access to energy resources in the region, its banks provided โcommodity-backed loans,โ which Venezuela pays back in oil, often in prices locked at current rates.[5] China recently declared a moratorium on debt service, but cannot cease lending because it is caught in a โcredit trapโ and must continue to help Venezuela try to repay its loans.[6]
Chinaโs continued oil purchases are also propping up the Maduro regime, in the face of US sanction threats. In 2019, US refineries ceased importing Venezuelan crude in an attempt to topple the Maduro regime by removing its largest importer. In August 2019, the United States threatened sanctions against any country that continued to engage in oil trade with Venezuela, which led Chinese oil imports from the country to slow, and then stop later that year. China โnever stopped buying,โ however, and instead has worked through a Russian state-owned firm to move Venezuelan oil to China through a delivery method that made it look as though the destination was Malaysia. This has sustained the Maduro regime, in direct opposition to US foreign policy.
Chinaโs incursion into the energy sectors of Brazil, Mexico, and Venezuela has offered alternatives to conditions-based loans of the United States, other Western nations, and multilateral financial institutions, but unconditional Chinese loans incur risks for irresponsible borrowing and bear long-term implications, such as debt distress, for these Latin American countries. Multilateral engagement in the region has been relatively weak for development loans, but initiatives like the International Development Bankโs new infrastructure data observatories could foster conditions for stronger and faster Western engagement and investment in Latin American countries, enabling these hydrocarbon giants to be more selective about engaging with China in the energy arena.
Matthew A. Hughes recently graduated from the Master of International Public Policy program at Johns Hopkins Universityโs School of Advanced International Studies. The opinions expressed in this article are those of the author alone and do not reflect the official position of the U.S. Army, the Department of Defense, or the U.S. Government.
[1] Jorge Blรกzquez and Josรฉ Marรญa Martรญn-Moreno, โEmerging Economies and the New Energy Security Agenda,โ Real Instituto Elcano, Madrid, Spain, 27 April 2012, as cited in Guy Edwards and J. Timmons Roberts, โA High-Carbon Partnership? Chinese-Latin American Relations in a Carbon-Constrained World,โ working paper 72 written for Global Economy & Development, Brookings Institution, March 2014, 13.
[2] On this, see Naki Mendoza, โPolitical Risk and Resource Nationalism: Why the Chinese are Moving Cautiously into Brazilโs Oil Sector,โ in Navigating Risk in Brazilโs Energy Sector: The Chinese Approach, edited by Margaret Myers and Lisa Viscidi, Inter-American Dialogue, October 2014, 4.
[3] Mendoza, โPolitical Risk and Resource Nationalism,โ 5-6.
[4] Guy Edwards and J. Timmons Roberts, โA High-Carbon Partnership? Chinese-Latin American Relations in a Carbon-Constrained World,โ working paper 72 written for Global Economy & Development, Brookings Institution, March 2014, 14.
[5] Edwards and Timmons Roberts, โA High-Carbon Partnership?,โ 14.
[6] Ben Gedan, in a presentation at Johns Hopkins SAIS, Washington, DC, 8 March 2021.
