The axis of oil: China and Venezuela

Ben Schiller
2 March 2006

The Chinese are coming. In no part of the world is this more evident than Latin America, where a series of trade agreements, infrastructural investments and bilateral visits over the past two years has begun to reshape the economic landscape. But economics is also politics. China seeks to present its new relationship with Latin America as part of its much-vaunted "peaceful rise", but how is it seen in Latin America itself – and in the United States?

The more radical of Latin America's new generation of leftwing leaders have few doubts. Hugo Chávez was in typically ebullient mood as he visited Beijing in December 2004. After signing a series of bilateral agreements (Venezuela's president has put his pen to at least twenty-five with China since coming to office in 1998) he speculated that Chairman Mao and Simón Bolívar, the Latin American revolutionary, would have been "great friends" if they'd ever had a chance to meet. He said both countries had "been victims of international aggressions, of a storm made in America". But each had managed to surprise the United States by "standing up on its own feet" and "building its own paths".

Chávez's rhetoric might have concerned Chinese officials who are keen for their country to keep a low profile in its international ventures – no more so in what the US still considers its "own backyard". In the wake of Chinese oil firm CNOOC's doomed $18.5 billion attempt to buy US-based Unocal in 2005, China's commerce ministry recommended its companies adopt a "softly-softly" approach when buying abroad, lest they stir up "anti-Chinese feeling" and have to pay a "a China premium".

Ben Schiller is a freelance journalist based in London. He specialises in United States politics, eastern Europe and corporate responsibility issues. His work has appeared in the magazine Ethical Corporation

Also by Ben Schiller in openDemocracy:

"The China model of development" (December 2005)

For its part, Venezuela continues to rely heavily on US oil revenues – 60% of its crude goes to the US, through its "downstream" subsidiary Citgo. Despite Chávez's escalating anti-Americanism, he needs the US to fund the country's extensive welfare programmes – not to mention his wider ambitions on the continent.

Still, cooperation between Venezuela and China is increasingly apace. CNPC, China's largest oil company, has licences to explore Venezuela's Orinoco oil belt – a potentially vast, untapped source of crude. Chinese companies are able to exploit the Caracoles and Intercampo Norte oilfields, and have options on others. And China is building a plant to process Orimulsión, a heavy tar fuel used in its factories.

The oil shipments started in recent months, at around 120,000 barrels a day, with plans to ramp up production to 1.6 million barrels a day in 2007. What does intrigue observers, however, is not so much the volumes, but the price. According to one well-versed source in the Venezuelan oil industry, China is paying only $3-$4 a barrel, a small fraction of the world market price charged to other foreign consumers.

Beyond oil, Venezuela bought a Chinese communications satellite in 2005 (to be named "Simón Bolívar", and launched in 2008). It has also purchased Chinese radar equipment to monitor its borders, and it is interested in working with the Chinese to upgrade its ageing airforce (the purchase of Spanish military aircraft was blocked by the United States in January 2006 on the grounds of a 1976 act permitting it to prevent the transfer of US-sourced technology).

The two countries are even cooperating on the internet. The oil-industry source says members of Venezuela's state oil company (PDVSA) recently travelled to Beijing to learn techniques for eavesdropping on internet traffic. Despite his romantic revolutionary image, Chávez – who apparently uses PDVSA for all kinds of non-oil activities – is not above the sort of humdrum authoritarianism normally associated with his Chinese friends.

South-South ambitions

China's Venezuelan policy is part of what some analysts call its "south-south" strategy – a plan to build a coalition of cooperating countries across Latin America and Africa.

In Africa, China has been expending huge amounts of soft credit, arms and other aid as it tries to cement ties with different regimes (including those in Sudan and Zimbabwe that other governments have shunned). Backed by Beijing, Chinese companies have been prospecting for oil and other raw materials, and building a wide array of infrastructure – including telecoms networks, sports stadiums, dams and railways – often at prices well below what western firms can afford.

In Latin America, China's ambitions are less well advanced. But its strategy has been given impetus by the elections of various left-leaning leaders – such as Evo Morales, president of Bolivia, and Nestór Kirchner, of Argentina – who may not exactly be Sinophiles, but are avowedly anti-American, and share some of Chávez's tendencies. Morales followed his January 2006 inauguration by reiterating his intention to renationalise Bolivia's gas industry, and pointedly included China (and excluded the United States) from his first round of foreign trips.

In another camp, leaders such as Brazil's Luiz Inàcio Lula da Silva, of Brazil, Chile's newly-elected Michelle Bachelet, and Tabaré Vázquez of Uruguay, are seen as more pragmatic, but no less receptive to Chinese investment.

On a visit to Argentina, Brazil and Chile in November 2004, China's President Hu Jintao announced plans to invest $100 billion in Latin America over a decade. As a start, he signed a $10 billion energy deal with Brazil for investments in its energy and transport infrastructure over two years (Chinese oil company Sinopec already has a $1.3 billion deal with Brazil's Petrobras to build a 2,000 kilometer natural gas pipeline). Chinese oil companies have also bought oilfields in Columbia, Ecuador and Peru, and have sunk $5 billion in offshore projects in Argentina.

As well as buying energy assets, the Chinese have also invested in transport networks to help take its purchases home: Chinese companies are, for instance, rebuilding Argentina's railways, and resurfacing Venezuela's roads.

China has also expressed interest in constructing and financing various projects to modernise the Panama Canal. A Hong Kong company already operates ports at either end, raising worries among some Republicans in Washington – and lately, Hillary Clinton – about China's effective influence over the waterway.

Riordan Roett, director of the western hemisphere program at Johns Hopkins University, in Washington DC, says the Chinese are serious about building lasting relations with the region: "There is clearly a long-term plan. They are really trying to understand the region." China has been sending some its best young diplomats to the region, Roett says, and it is also setting up local "Confucius Centres" that are designed to deepen understanding of Chinese culture.

The diplomats are also hard at work on another matter of central importance to China: Taiwan. Of the twenty-four countries with official diplomatic relations with Taiwan, eleven are in Latin America. Taiwan has been competing with China in delivering and aid investment to the countries that are still on its side. But China has managed to peel off three countries – Grenada, Dominica, and Paraguay – since 2004. China has also given substantial support, including peacekeeping assistance, to Haiti, leading to speculation that it will soon join the list of switchers.

United States reactions

At the official level, United States reaction to China's Latin campaign has been muted, and critics of the administration say it has taken its eye off the ball while it has been engaged in the middle east. The January-February 2006 edition of the venerable journal Foreign Affairs asks whether the US is "losing" Latin America, while a June 2005 War College report argued that China represents a serious long-term security threat to US interests in the region.

The US has, however, blocked China's application for "donor status" at the Inter-American Development Bank (IDB) – on the grounds that China itself is recipient of loans from the World Bank. The US argues that China should not be allowed to borrow from one multilateral bank to pay another.

An IDB spokesperson says negotiations between China and the IDB are continuing, however, and most observers think it will soon join Japan and South Korea as members. Donor status would give Chinese companies opportunities to bid for IDB-funded infrastructure projects, as well as access to high-level Latin American officials.

What would really raise US hackles would be if Venezuela decided to sell China its US subsidiary Citgo. Such a move would allow Chinese oil companies to ship Venezuelan crude to refineries on the US's western seaboard, and from there on to ships across the Pacific. Observers say Chávez has discussed a potential deal with the Chinese, but he shares with China a desire not to make relations with the US any more complicated than they are already.

One major obstacle to increased energy cooperation between China and the region is the sheer distances involved, and the lack of straightforward shipping routes. As well working on the Panama Canal, China is also interested in funding a pipeline through Columbia, which would take Venezuelan crude to the Pacific.

Also in openDemocracy on Chinese business, corporate responsibility, and environmental policy:

Andreas Lorenz, "China's environmental suicide" (interview with Pan Yue, China's deputy environment minister) (April 2005)

Chris Melville & Olly Owen, "China in Africa: a new era of "south-south cooperation"
(July 2005)

Agnes Chong, "Chinese civil society comes of age" (September 2005)

Simon Zadek, "China's route to business responsibility" (November 2005)

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Promises, promises

If America's response has been quiet so far, over time it may be able to argue that China has not delivered on its promises to be a force for development and progress in Latin America.

In many cases, development experts say, Chinese financing is unlikely to be direct investment, but "tied loans" offered at low interest rates on the proviso that contracts are given to China's state-run companies. China has used such loans widely in Africa, leading to fears that investment will in fact fail to deliver jobs, and benefit local businesses.

Celia Szusterman, a Latin American lecturer at London's University of Westminster, says the lack of hard cash has already caused disappointment in Argentina, and some recriminations for the government in the press.

There are also questions about Chinese environmental practices, with concerns being raised that CNPC's exploration activities threaten various Amazonian habitats. According to the NGO Amazon Watch, its concessions in Peru threaten the Amarakaeri indigenous people

A Brazilian dam, constructed by a Chinese company, has also provoked concern among campaigners. The Belo Monte project, in the eastern Amazon, is being built to provide electricity for various Chinese-run mines in the region, raising protests that it will benefit Chinese, rather than local, interests.

On trade, there is a fevered debate among academics over whether Chinese commerce will help or hinder the region. Only Chile – which has benefited handsomely from copper trade with China – has so far signed a free-trade pact with China. Others are still trying to analyse the net impacts, says Lucio Castro, senior economist at consultants Maxwell Stamp. Industrial groups in Brazil and Mexico have warned their government off the idea of liberalising trade further, in case Chinese goods simply swamp their markets.

Already some of the sheen that surrounded President Hu Jintao's trip to Latin America in November 2004 has worn away, with many questioning whether investment will really materialise, and, if so, in what form. Despite the promise that China's billions will deliver benefits for ordinary people, the long-term consequences of China's Latin push are still open to question.

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