By Matthew Hughes
As part of China’s “energy diplomacy” to “secure long-term access to energy resources,” most of its investments in Latin America have been in resources and energy,[1] especially among the region’s 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). China’s 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 region’s hydrocarbon giants. Chinese engagement in Brazil’s energy sector has fostered infrastructure development but threatens Brazil’s 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 countries’ governments because the unconditionality of Chinese loans and their own unsustainable borrowing foster debt distress.
China’s heavy engagement in Brazil’s electricity sector and gradually increasing participation in oil extraction have benefitted the country’s 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 Brazil’s electricity sector in 2010, Chinese companies, most of them state-owned, have acquired 10 percent of Brazil’s generation, 12 percent of its transmission, and 12 percent of its distribution segment by 2019. China’s State Grid, which controls CPFL Energia, Brazil’s second-largest power distribution company, is a major player in Brazil’s 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 Brazil’s 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 Brazil’s 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 Brazil’s 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, Brazil’s 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 Brazil’s 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 “spend without bounds” and generate perpetual debt. China’s involvement in the energy sector grew during the tenure of former President Enrique Peña Nieto with the $5 billion SINOMEX Energy Fund, established by Mexico’s state-owned oil and gas firm Pemex and China’s 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 Andrés Manuel López Obrador’s (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 banks’ 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 “make funds available to boost pandemic-related fiscal support,” 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 Guyana’s agreement with the Ministry of Foreign Affairs in Taipei to open a Taiwan representative office in Guyana, in violation of China’s “One-China Principle.” 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 Mexico’s renewable energy sector with great force, even though renewables have lost momentum under AMLO. China’s State Power Investment Corp recently acquired Zuma Energia, Mexico’s leading independent renewables company, for an undisclosed sum. China may soon lead renewables development in Mexico given the country’s 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 Venezuela’s oil sector.
In the case of Venezuela, China’s unsustainable debt model is harming the borrower and lender. As the CDB’s 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 China’s strategy to secure long-term access to energy resources in the region, its banks provided “commodity-backed loans,” 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 “credit trap” and must continue to help Venezuela try to repay its loans.[6]
China’s 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 “never stopped buying,” 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.
China’s 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 Bank’s 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 University’s 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 Blázquez and José María Martín-Moreno, “Emerging Economies and the New Energy Security Agenda,” Real Instituto Elcano, Madrid, Spain, 27 April 2012, as cited in Guy Edwards and J. Timmons Roberts, “A High-Carbon Partnership? Chinese-Latin American Relations in a Carbon-Constrained World,” working paper 72 written for Global Economy & Development, Brookings Institution, March 2014, 13.
[2] On this, see Naki Mendoza, “Political Risk and Resource Nationalism: Why the Chinese are Moving Cautiously into Brazil’s Oil Sector,” in Navigating Risk in Brazil’s Energy Sector: The Chinese Approach, edited by Margaret Myers and Lisa Viscidi, Inter-American Dialogue, October 2014, 4.
[3] Mendoza, “Political Risk and Resource Nationalism,” 5-6.
[4] Guy Edwards and J. Timmons Roberts, “A High-Carbon Partnership? Chinese-Latin American Relations in a Carbon-Constrained World,” working paper 72 written for Global Economy & Development, Brookings Institution, March 2014, 14.
[5] Edwards and Timmons Roberts, “A High-Carbon Partnership?,” 14.
[6] Ben Gedan, in a presentation at Johns Hopkins SAIS, Washington, DC, 8 March 2021.
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