Mapping China's Energy Investments in Latin America
Mapping China's Energy Investments in Latin America
Erik Ribeiro, Carlos Ungaretti
In 2020, amid the Covid-19 pandemic and a fierce geopolitical competition with the United States, Chinese companies faced troubles in their quest for overseas acquisitions. Overall, these investments amounted to only US$ 31.1 billion, the lowest value since 2007. On the other hand, Latin America was responsible for US$ 7.7 billion (24.8% of total), which represented more than Europe and North America combined. The trend can also be explained by the economic, social and political instability in the region, which prompted capital flights from traditional sources in the West and a new outlook in China’s global quest for influence. From a local perspective, the larger question is where these investments are being made and how they affect national development and environmental policies.
In this sense, the article maps China’s energy investments in Latin America and the Caribbean (LAC) since 2005, highlighting their main characteristics and variations over time. When compared to other types of foreign direct investment (FDI), energy arises on top of the China-LAC agenda, comprising more than 55% of the country’s FDI in the region. From 2005 to 2020, China invested US$ 198.2 billion in the LAC, with US$ 109.7 billion in the energy sector alone. The energy investments are heavily concentrated in six South American countries: Brazil (US$ 50.7 billion), Venezuela (US$ 13 billion), Argentina (US$ 12.2 billion), Peru (US$ 9.1 billion), Ecuador (US$ 7.3 billion) and Chile (US$ 7.1 billion).
Most Chinese companies involved in these transactions are state-owned, either in the oil sector (China National Petroleum Corporation), CNPC, China National Offshore Oil Corporation (CNOOC), Sinopec and Sinochem) or in the electricity sector (CTG, State Grid and SPIC). Over the years, they have shown strong preference for mergers and acquisitions in Latin America. This internationalisation strategy has been chosen due to the learning curve of businesses in new markets, and also to avoid potential accusations of neo-colonialism and environmental damages associated with greenfield investments. Going beyond profit-seeking, Chinese companies involved in the LAC region are oriented by national planning related to economic development (such as the five-year plans) and energy security. In many cases, energy FDI deals have also been linked to loans and financing by the China Development Bank (CDB) and the Export Import Bank of China, with over US$ 46 billion disbursed since 2000. According to a recent report, the more frequent LAC borrowers have been Brazil, Ecuador and Venezuela.
Sector-wise, China has prioritised oil and gas projects in Latin America. Large deals of Chinese FDI in oil were signed between 2010 and 2013, with partial acquisitions in Brazil and Argentina making headlines in both countries. In Brazil, Sinopec and Sinochem respectively purchased significant shares of the Spanish Repsol and the Norwegian StatOil subsidiaries. The opening by the Brazilian government of pre-salt oil fields to foreign investors was met with successful bids by the CNPC and CNOOC in Libra (2013) and, more recently, with a small share (10%) in Buzios (2019). The Argentinian oil sector received high profile FDI in the partial acquisition of Bridas Corporation (50%) by CNOOC and of the American subsidiary Occidental Argentina by Sinopec.
From 2010 onwards, China diversified its energy FDI towards electricity generation, particularly in hydropower generation projects in countries like Argentina, Bolivia, Brazil and Ecuador. In the latter, Sinohydro signed a contract for the construction of the Coca Codo Sinclair hydroelectric power plant, which is the largest energy project in Ecuadorian history. However, an inspection in 2018 found several structural failures in the Coca Codo construction, which have been blamed by the former Ecuadorian Minister of Energy Fernando Santos on the poor quality of materials used by Chinese infrastructure projects. Another issue is the location of the hydroelectric project, which has a high exposure to seismic activity and could be severely compromised by earthquakes.
In Argentina, a joint venture between the Argentinian Represas Patagonia and the Chinese Gezhouba Group was awarded a US$4.7 billion contract in 2013 to build the Nestor Kirchner-Jorge Cepernic hydroelectric complex, which will be fully funded by Chinese sources. The hydropower project in Argentina was also received with a lot of public scrutiny and criticism due to environmental concerns. In 2016, the Argentinian Supreme Court even suspended its activities until a new study was performed by the national Ministry of Energy and Mining to evaluate these issues. More recently, in 2020, another mega deal was signed by China Three Gorges and State Grid Corporation in the Chilean and Peruvian electricity sector: together, the two Chinese companies purchased over US$ 6.5 billion of Sempra Energy’s assets.
Over the last couple years, China has also been interested in building and financing renewable energy projects in the LAC region, with an initial focus on traditional partners like Brazil and Argentina. As we notedin the Energy Review’s September 2020 issue, the China General Nuclear Power Group (CGN) has become one of the main producers of clean energy in Brazil, including its second largest solar power plant and six wind farms. In Argentina, the China Export-Import Bank is financing the Cauchariproject, which is the largest solar power park in Latin America. Other companies such as PowerChina are also making inroads in Argentina with several projects in the EPC (engineering, procurement, construction) model, including Cauchari.
The future of Chinese energy FDI in the LAC region is promising, but also susceptible to a number of political and technical issues. In order to foster more greenfield investments and bring development to Latin America, China will have to put considerable effort into long-term relationships with the local countries. This includes managing the practices by its national companies and financing agencies, alongside more rigorous oversight and regulations by their Latin American governments and private partners. On a positive note, China’s interest in diversifying its projects towards clean energy - such as solar and wind power - may change some of the negative perceptions caused by a few mega-projects in the region.
Another relevant indicator will be the political climate between China and the LAC region, considering its traditional geopolitical role as the United States’ area of influence. In this sense, many countries are signatories of the Belt and Road Initiative (BRI) and members of the Asian Infrastructure Investment Bank (AIIB). However, Brazil and Argentina have not signed the BRI and countries like Colombia, Mexico and Paraguay are not involved in either of the two agreements. More importantly, the participation (or not) of LAC countries in the BRI and AIIB has to become part of a broader regional strategy for the Asian Century, which will have definiting impact on all sides of the Latin American societies in the future.
Dr.Erik Herejk Ribeiro is a Senior Fellow, and Carlos Renato Ungaretti is an Associate Researcher at the South American Institute of Policy and Strategy (ISAPE), Brazil.