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Populist oil producers such as Venezuela, already slipping ever deeper into debt, could face a revenue crisis, experts say. Here a PDVSA facility. (Photo: PDVSA)
Venezuela, here represented by Puerto Cabello, last year posted Latin America's strongest trade growth with China. (Photo: IAFE). See report
Wednesday, August 21, 2013
Perspectives

China Slowdown Hits Venezuela

Venezuela will likely be hit most among Latin America's energy markets by a slowdown in China’s economy, experts say.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue
 

Chinese banks have lent nearly $40 billion to finance energy-related projects in Latin America since 2005, and Chinese state-owned oil company CNPC has signed agreements worth billions of dollars this year alone in the region. As concerns rise about an economic slowdown in China, how would Latin America's energy sector be affected? In which countries and sectors is China's energy-related investment most significant? 


R. Evan Ellis, associate professor at the Center for Hemispheric Defense Studies in Washington: 
The impact is different in petroleum versus renewable energy. It also depends on whether a 'China slowdown' simply means below 7 percent GDP growth or whether the Chinese banking system, burdened by an excess of marginal loans, is pushed into a crisis. Absent a war in the Middle East, decelerating Chinese growth would lower petroleum prices and delay investments across Latin America to bring new petroleum on line. Reserves that are expensive to develop, such as Brazil's offshore 'pre-salt' deposits, would be most affected. Troubled refineries, such as Moin, the Refinery of the Pacific, and Abreu e Lima, would remain paralyzed. Populist oil producers such as Venezuela, already slipping ever deeper into debt, could face a revenue crisis. In Argentina, companies like Chevron would be slower to help the government develop its shale reserves. Yet Chinese national oil companies (NOCs) might buy more companies with Latin American holdings, taking advantage of depressed asset prices. Beyond petroleum, slowing demand in the PRC would accelerate China's push for renewable energy in Latin America, such as the Coca Coda Sinclair and Multiple Rositas hydroelectric facilities, Goldwind and Sinovel wind farms and China Sky Solar's $1.2 billion of  investments in Chile. Such projects allow Chinese banks to invest capital outside of the PRC while generating work for Chinese companies as demand evaporates at home. The panorama changes, however, if Chinese banking enters into crisis. Without capital, Chinese acquisitions and programmed investment in Latin petroleum would disappear at the same time that Chinese credit for Latin American renewables projects and non-energy sectors evaporated.


Sun Hongbo, associate professor at the Institute of Latin American Studies of the Chinese Academy of Social Sciences in Beijing:
 China's energy cooperation with Latin America will continue to maintain a stable and rising profile which has little relationship to Chinese economic growth changes in the short term. Chinese oil companies have regarded Latin America as a strategic region in the long term for internationalizing their business, as well as safeguarding China's energy security. According to BP statistics, the oil China imports from Latin America reached approximately 32 million metric tons in 2012, or 9.2 percent of China's total imports. In China's 'go global' policy initiative, the energy sector is a strategic area for Chinese companies to get involved in. China's recent role in Latin America has featured dynamics between Chinese banks and energy companies, who continue to keep their eyes on finding business opportunities in energy-related deals based on their technological advantage, financial liquidity, management capacity and risk assessment. In the next few years, Chinese oil companies expect to tap into the Mexican oil industry while they strengthen their commercial presence in different forms in Venezuela, Ecuador, Brazil, Colombia and other countries. In fact, Chinese energy companies have gone beyond the oil sector in Latin America, extending their cooperation to wind, solar, hydropower and other fields. For example, China's State Grid Corporation has rapidly expanded its business in the Brazilian electricity grid in recent years. It is evident that China's energy role in Latin America will not only be shaped by China's energy interest, but also reshaped by Latin American host countries through their interests, needs and regulatory framework.


William J. Norris, professor of Chinese foreign and security policy at the Bush School of Government and Public Service at Texas A&M University: 
In general, China's slowdown will affect the Latin American energy sector through two channels: trade and investment. The downturn will be most acutely felt in nations for which Chinese trade demand represents the largest percentage of the nation's total energy exports. It is important to distinguish between trade and investment flows from China into the Latin American energy sector. Obviously, trade is going to be a bit more sensitive to demand shocks. Once a fixed investment has been made, it tends to be much stickier. However, it would not be surprising to see planned investments that have been merely 'announced' or 'pledged' be delayed. China has been a particularly large presence in the energy sectors of Brazil, Venezuela, Argentina and Ecuador. While Brazil and Argentina are much bigger economies that may be better able to weather the downturn, smaller nations that rely heavily on Chinese energy demand (in particular, Venezuela) are in for a rough ride. On the investment side, the most affected projects will be those targeting less commercially viable reserves. To the extent that Chinese capital was willing to fund offshore projects that presented technical challenges sufficient to keep other international investors on the sidelines, more ambitious projects may find it harder to secure capital. Another way to think about this is what does China uniquely bring to the table? If China is willing to fund projects at rates lower than others, or if Chinese capital is less risk averse, or if Chinese demand for energy exports constitutes a significant portion of a nation's total energy exports, these would be the counterparties most exposed to a Chinese downturn.


Philip Andrews-Speed, principal fellow at the Energy Studies Institute of the National University of Singapore: China's oil imports are likely to keep growing for the foreseeable future as the demand for oil is driven by transport and petrochemicals. Also, the appetite of the Chinese NOCs for new overseas investments shows no sign of abating yet. Indeed, the last four years have seen these NOCs change their focus from Africa and Asia to the Americas, where large, attractive opportunities exist. The current slowdown in China's economy may result in a modest decline in the rate of additional investment into Latin America and a modest decline in the rate of increase of oil imports from the region. In the unlikely event that China enters a sustained period of very low growth (below 4 percent per year), then the effect on overseas investments and on oil imports could be dramatic. Beyond China's rate of growth, there are two things to watch for. The first is any move by China's government to restart the reform of the NOCs and of other state-owned enterprises. This might cause the NOCs' operating and financial environment to become markedly less supportive of overseas ventures. Secondly, if political and regulatory uncertainty in Latin America increases, China's NOCs may choose to direct new investment to other regions.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor

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