China s Strategic Maneuver in Latin America: The Acquisition of Oil Resources

1. China�s Strategic Maneuver in Latin America: The Acquisition of Oil Resources Chung-chian Teng Professor Department of Diplomacy National Chengchi University

2. From the announcement of Monroe Doctrine in 1823, the U. S. decision-makers has conceived various kinds of policies to consolidate its dominant position in the Western Hemisphere and taken the later as its backyard for more than one and a half century.

3. The vast Pacific Ocean put some kind of constraints on the development of close relations between China and the Latin America. However, the interactions between China and Latin America dates back to at least the mid 16th century Ming Dynasty when Chinese goods were shipped to Pacific ports in Mexico and Peru by way of Manila, the Philippines.

4. At the turn of this century, China began to pay real interest in and to foster closer relationship with its distant neighbor---the Latin America.

5. I. The Rise of China and Its Economic Security

6. Chinese economy has been expanding rapidly in terms of economic growth and foreign trade. Its economy ranked 4th in the world only behind the U.S., Japan, and Germany; its GDP was $2.23 trillion in 2005 with annual growth rate 10.2%.

7. An academic study predicates that China�s economy will maintain its rising momentum, but a little slowly in the next fifteen years; its GDP growth rate will be 8.9 %, 8.3 %, and 7.0 % respectively for the 2006-2010, 2011-2015, and 2016-2020 periods.

8. Chinese international trade has been boosting in the 21st century. Between 2001 and 2006, China�s exports grew from $266.2 billion to $969 billion with average annual growth rate 25.8%; its imports from $243.6 billion to $791.6 billion with average annual growth rate 24.9%. China has become the world�s third largest trading nation, following the United States and Germany in 2004.

9. As the Chinese economy grows, Chinese industries increasingly rely on imported supplies of vital resources. China is now the biggest consumer of copper, tin, zinc, platinum, steel, and iron ore; the second biggest consumer of aluminum and lead; the third biggest consumer of nickel.

10. The most urgent need is for energy resources. China became a net oil importer in 1993 and the second largest oil consumer and importer in 2004, behind only the United States. According to the International Energy Agency, China will need to import up to 85 percent of its crude oil and 50 percent of its natural gas by 2030.

11. To guarantee its access to important raw materials, China has sought to boost its trade and investment relations around the world and, especially, establish closer relationship with resource-rich nations. Latin America is not an exception.

12. II. The Relative Capacity of Latin American Oil Reserve and Production

13. The proved oil reserve in Latin America scales down from 124.8 billion barrels (11.2% of the world) in 2000 to 117.2 billion barrels (9.8% of the world) in 2005. The proved oil reserves in Latin American only lag behind two selected areas, i.e. Europe & Euroasia and Middle East.

14. With regard to the oil production, Latin American nations altogether maintain a stable situation from 10263 thousand barrels per day in 2000 to10723 thousand barrels per day in 2005.

15. Concerning export capacity, Latin American nations together sent abroad 4157 thousand barrels of crude oil per day (11% of total world ) and 1436 thousand barrels of oil product in 2005 (12% of total world). In comparison with other regions, Latin America as a whole ranked the fourth, lagging behind Middle East, former Soviet Union, and West Africa.

16. In accordance with the capacities possessed by Latin America, it goes without saying that China could not ignore the abundance of oil reserve in Latin America. Because oil resources concentrate into two major Latin American nations (i.e. Mexico and Venezuela), it is much easier for China to deal with.

17. III. China�s Oil Energy Strategy and Behavior in Latin America

18. When China National Petroleum Corporation(CNPC)won an international bidding in 1993 and obtain the rights to operate and manage two blocks in the Talara oil field of Peru, it was the virgin show of the Chinese oil industry in the international oil market.

19. In the 21st century, China strategically designates Latin America as its major supplier of oil and natural gas. In China�s 10th Five-Year Plan(2001~2005), Chinese national oil companies are encouraged to direct their foreign direct investment into three strategic regions for the purpose of oil exploration and development and the South America is one of them.

20. The core of Chinese oil energy diplomacy is the �Presidential Diplomacy� and �High-Ranking Official Diplomacy,� which conduct by members of Politburo Standing Committee of the Communist Party. In this kind of diplomatic activities, Chinese leaders make critical decisions and signs agreements on the award of assistances in exchange for the guarantee of acquisition of energy resources.

21. Official visits by Hu Jintao and Zeng Qinghong in 2004 and 2005 respectively signified China�s major links in Latin America. They paid visit to nine most important Latin American nations: Argentina, Brazil, Chile, Mexico, Peru, Venezuela, Jamaica, Trinidad & Tobago, and Cuba. These nations are China�s major suppliers for natural resources including oil, natural gas, copper, iron, aluminum and others.

22. In addition to important trade and investment cooperation agreements, Argentina, Brazil and Chile recognized China's full market economy status,which could prevent possible anti-dumping measures used by other nations as a means of trade protectionism against China .

23. To consolidate its relations with major Latin American nations, China has provided capitals and offered various kinds of assistance packages for the autonomous development of the receipt country in Latin America.

24. The assistance packages go beyond energy sector, including transportation systems,telecommunication facilities, rural development, social development and scientific cooperation. For example, , China will assist Venezuela to produce and launch its first communication satellite in 2008 and let the latter enjoy autonomy in the field of telecommunication.

25. IV. Chinese Acquisition of Oil and Natural Gas in Latin America

26. The milestone of bilateral energy cooperation was the visit of Chinese vice president Zeng Qinghong to Venezuela in January 2005. In China�s the 10th Five-Year Plan and Venezuela was designated as one of eight strategic cooperation nations in the field of oil and natural gas.

27. The exports of Venezuela oil to China have been presenting a spiral upward trend ever since 2005.

28. President Chavez has reiterated the final goal that oil exports to China is going to climb to 1 million barrels per day by 2012.

29. In an oil supply agreement between CNPC and Petroleos de Venezuela, SA (PDVSA) in November 2005, Venezuela commits to supply 100 thousand barrels of oil and 60 thousand barrels of fuel oil per day before 2007.

30. Not a year later, Venezuela�s Energy and Petroleum Minister Rafael Ram�rez made announcement in August 2006 that oil shipment to China would enhance from 150 thousand barrels per day to 200 thousand barrels per day by the end of the year.

31. A Chinese report in March 2007 confirmed the actual implementation of the 2006 statement and went further to claim that oil from Venezuela to China will be 300 thousand barrels per day by the end of 2007.

32. One important aspect of China�s energy acquisition in Latin America lies in the equity investment in oil production by Chinese national oil companies. Traditionally, CNPC has played the major role of investment in oil and natural gas.

33. CNPC cooperates with Perupetro to exploit and develop Talara oil field in the Pacific coastal area of Peru; with PDVSA in Venezuela; with Ecuador�s Petroecuador.

34. Other major Chinese national oil companies followed CNPC�s suit, because of the urgent energy needs in China.

35. In Brazil, China Petroleum & Chemical Corporation (Sinopec) and Petr�leo Brasileiro SA (Petrobras) build up a strategic cooperation relationship. Concerning oil supply, Brazil exported 5 million barrels to China in 2003 and 14 million barrels in 2004.

36. Sinopec obtained a production contract from the state-run Cubapetroleo Company in early 2005 to work in the northwest coast area of Cuba.

37. Sinochem Corporation paid US$100 million to buy Block 16 in an Ecuadorian oilfield, which now produces 57, 000 barrels of oil per day, from oil major ConocoPhillips.

38. One recent major step was the formation of Andes Petroleum Co. by three major Chinese national oil companies (i.e. CNPC, Sinopec, Sinochem)and this joint venture will pay US$1.42 billion for the possession of Canadian EnCana Corporation�s assets in Ecuador.

39. Up to now, China� s oil strategy in Latin America places its emphasis on the supply diversification of oil energy and supplement to the possible energy shortage. The major sources of China�s oil imports are from Middle East (40%), Africa (23%), and Asia (21%) and three largest oil importers are Saudi Arabia, Angola, and Iran.

40. In the future, the oil import from Venezuela may affect China�s strategy.

41. V. Challenges to China�s Activities in Latin America

42. 1. The U.S. Factor Although the U.S. ranks the third largest oil producer, only behind Saudi Arabia and Russia, it needs to import oil from foreign nations, roughly about 13 million barrels per day. U.S. concerns about the fluctuation of international oil market and three major oil suppliers, i.e., Canada, Mexico, and Venezuela.

43. In early 2007, the Bush administration took diplomatic actions taking aim at the supports from Latin American nations and visited five Latin American nations, i.e. Brazil, Uruguay, Colombia, Guatemala and Mexico. In fact, the most meaningful visit was in Brazil.

44. Bush pursued for bilateral cooperation with Brazil on the production and promotion of biofuels. During Bush�s stay in Brazil, two countries signed �Memorandum of Understanding to Advance Cooperation on Biofuels� to promote the production of ethanol in the Western Hemisphere as an alternative to oil.

45. The priority of American plan is to promote biofuels in Central America and the Caribbean, which is traditional backyard of the U.S. It is widely held that this is a kind of counteract action for the purpose of undermining Chavez�s efforts to form anti-American alliance in Central America and the Caribbean. The U.S. action should be a warning signal to China.

46. 2. The Latin American Factor In recent years, major powers (such as Brazil, Argentina, and Venezuela) in the South America have involved into the formation of Latin American identity and with concrete results.

47. Mercosur and the Andean Community coordinated common actions and signed �Cuzco Presidential Declaration� in December 2004 to set up South American Community of Nations (CSN) and Chile, Guyana, and Surinam joined it.

48. In the First Summit of CSN of September 2005, presidents agreed upon several major points: The establishment of the basic structure of CSN; The formation of South American Free Trade Area; A call for a new name, i.e., Union of South American Nations; The formation of a permanent secretariat in Quito, Ecuador.

49. Ever since 2003, a series of meeting among South American nations have been summoned to lay the foundation for energy integration. The formal beginning of energy integration was the resolution made by Latin American Energy Organization on October 2003.

50. The first meeting of South American Ministers of Energy in 2004 declared the implementation of concrete actions towards the establishment of PETROSUR. In the Declaration of the First South American Energy Summit in 2007, presidents reached the consensus to create the South American Energy council to present proposed guidelines for the South American Energy Strategy, the Action Plan and the South American Treaty on Energy for further discussion.

51. A more concert cooperation of energy among Latin American nations was the Venezuela�s initiative to unite thirteen Caribbean nations by forming Petrocaribe and providing discount crude oil to members of this energy alliance.

52. The other one is the agreement reached at the 2006 Summit to study the possibility of building a natural gas pipeline from Venezuela to Argentina with sub-links to Bolivia, Uruguay, and Paraguay.

53. The evolution of the independent Latin American identity may be a facilitating factor for China�s presence there, because Latin American nations needs supports from another major power. Rather than taking this kind of friendship and good gesture as granted, China should avoid any negative images of a hegemonic power.

54. 3. Problem of Oil Shipment and Refining The importation of oil from the Latin American must overcome two hurdles. First, crude oil from Latin America is heavy and sour, which need different kind of refining technology and equipment to process. Therefore, it had better have specific refinery to handle crude oil from Latin America. Second, it is the safe and security shipment of oil from eastern part of the South America to China via Pacific Ocean.

55. The planning expansion of the Panama Canal will solve, to a large extent, the problem of oil shipment from South America to China.

56. Without any alternative to sea transportation of South American oil, China must rely on the cooperation and friendship with the U.S. to guarantee the security of Pacific sea lanes, at least in short term.

57. VI. Conclusion

58. When China started to craft its oil strategy in Latin America, its first priority was to have supply diversification of oil and gas and to supplement the necessity of economic development.

59. The second priority was to avoid direct challenge or confrontation with the United States. Under the leadership of Hu-Wen, China has presented quite low military profile vis-�-vis the Unites States in Latin America. Through various kinds of channels, China has transmitted a clear message that it would not like to have military and political confrontation or showdown with the United States.

60. After all, China�s oil strategy and diplomacy in Latin America has garnered some positive results. China and the Latin American nations are in good term politically and economically. We have witnessed the increasing oil supply from Latin America in general, Venezuela in particular.

61. While maintaining this kind of good relations with and securing stable oil supply from Latin American nations, China should prevent any missteps, which could yield negative effects on Sino-American political and economic relations.

62. End of Presentation Welcome Your Comments