The Rise of the Dragon
Latin America offers both a means to diversifying China's sources of imported crude and a way for its oil companies to connect with the global market. At present the total Chinese investment, mainly in oil projects, has reached 35 billion dollars

In 2016, trade volume between China and Latin America amounted to 216.6 billion dollars, 16 times higher than the level in 2000, accounting for about 6 percent of China’s foreign trade volume, up from 2.7 percent. Now China has become the largest trading partner of many Latin American countries. In 2016, China’s non-financial direct investment in Latin America stood at 29.8 billion dollars, an increase of 39 percent over 2015, with large merger and acquisition projects continuing to emerge. In the traditional energy field, cooperation in oil and gas is still the principal factor for the relationship between China and Latin America. Latin America serves not only as an important source ensuring the diversity of crude oil imported by China, but also as a key and strategic region for China’s oil companies to “go global."

Status quo of China-Latin America energy cooperation

China and Latin America enjoy various forms of energy cooperation with bilateral oil and gas projects as the focus. At present China has participated in 28 oil and gas projects in Latin America, and the total investment, mainly in oil projects, has reached 35 billion dollars, of which China National Petroleum Corporation (CNPC) claims 71 percent of the equity. Sino-Latin America oil and gas cooperation started with Peru in 1993, and now has covered the whole industrial chain. Regarding oil and gas exploration and engineering technical services Chinese oil companies have more than 40 projects in Latin America, covering areas of exploration, development, refining and oil and gas pipeline construction. In terms of energy trade Venezuela was China’s seventh largest source of oil import in 2012. China imported 15.2903 million tons of crude oil from Venezuela, 5.6 percent of total crude oil imports. But due to reduced production in Venezuela, China’s import of crude oil dropped 12 percent in 2014. “Loan for oil” is the most distinctive form of energy cooperation between the two sides. This cooperation model dates back to 2007, when China and Venezuela jointly founded the “Co-financing Fund.” China invested 4 billion dollars in the fund, while Venezuela took increasing crude oil exports to China as repayment guarantee. In May 2009, China and Brazil officially signed the first “loan for oil” agreement between China and a Latin American country: China provided Petrobras, Brazil’s national oil company, with a 10 billion dollar loan for ten years, while Brazil agreed to a daily supply of 150,000 barrels of crude oil to China in 2009 and 200,000 barrels from 2010 to 2019. Later, China also inked a 1 billion dollar “loan for oil” agreement with Ecuador in 2009 and two agreements with Venezuela in 2010 and 2014 valued at 20.6 billion and 4 billion dollars respectively, making the “loan for oil” project worth more than 30 billion dollars. Apart from oil and gas cooperation, the two sides’ cooperation in hydropower is on the rise. By 2013, China had eight completed or ongoing hydropower projects in Latin America, including those in Belize and Honduras, countries that haven’t established diplomatic ties with China. In addition, 12 hydropower projects worth over 4.5 billion dollars in total are under planning, with six in Ecuador, two in Honduras and one each in Guyana, Peru, Costa Rica and Argentina. Sino-Latin America cooperation in oil and gas has made an enormous contribution to the development of the oil and gas industry, economic growth, employment, environmental protection and community building in the region, laying a solid foundation for deepening Sino-Latin America cooperation. Recently, the two sides’ cooperation in renewable resources has been growing by leaps and bounds. With its strong financial strength, China is seizing the opportunity to export technologies and products in this field to Latin America, exports which will become a “growth point” for future economic and trade exchanges and investment between the two sides. Regarding solar energy, Chinese companies have carried out a number of projects in the region. SkySolar, a private-owned Chinese enterprise, entered the Latin American market in 2011 by building solar photovoltaic power plants in Sobral, Ceará, Brazil. In 2012, it invested another 900 million dollars to build an 18-megawatt photovoltaic power plant in Chile, the first large ground grid-connected solar-power station in Chile. In October 2012, Yingli Solar received its largest photovoltaic order from Latin America to exclusively supply 40-megawatt components for a Peru power station project. In July 2013, Suntech Power announced that it would supply components for a solar power station in Baja California Sur, currently the largest such station in Mexico. In terms of wind power, Sinovel entered the Brazilian market in September 2012 by supplying 23 sets of wind turbines for the wind farm in Sergipe; Goldwind developed four projects in the region in 2012, of which two are in Chile, one in Ecuador and the other in Panama. In terms of new energy vehicles, BYD’s E6 electric cars were launched in 2013 in Bogota, the capital of Colombia, becoming South America’s largest taxi fleet composed entirely of electric cars. It is estimated that from 2013 to 2030, at least another 350 billion dollars are needed for investment in renewable energy. Relying on its strong financial strength China is seizing the opportunity to transport its technologies and products concerning this field to Latin America. Among the over 50 billion dollar planned investment in Brazil announced by Premier Li Keqiang in 2016, over 40 billion dollars will be devoted to new energy and infrastructure projects, while only about 10 billion will be used for traditional energy projects.

Major problems faced by Chinese enterprises

Sino-Latin America energy cooperation still faces great challenges. 1 | Long distance and high transport cost Energy has to be transported through the Pacific, resulting in high transport costs. China and Latin America are not endowed with geographical advantage in energy cooperation. In particular, energy powers such as Venezuela and Brazil are located in South America, even farther from China. Due to distance and high transport cost, oil and gas imports from Latin America are more costly when compared with those from Central Asia and Russia. 2 | Imbalance and instability in economic and social development in Latin America Latin America and China are considerably different in customs, religion, political systems and laws and regulations. Economic and social development in Latin America are hindered by uncertainty, and the region’s economic structures are often unreasonable. Meanwhile, the region is plagued with political instability, leadership change, strikes and unexpected political events, all of which seriously affect regional economic development and hinder Sino-Latin America energy cooperation. 3 | Rising environmental cost As the planet is getting warmer, the issue of low-carbon economy has attracted attention. Latin American countries are increasingly aware of the significance of environmental protection and have successively promulgated environmental protection laws and regulations. Higher environmental cost will lead to increasing cost of energy investment in Latin America. For example, Ecuador has launched a plan to protect tropical rain forests, requiring foreign oil companies to strictly comply with the rules and compensate for damages. This measure and similar measures in other countries have driven the environmental cost of Sino-Latin America energy cooperation to rise. 4 | Mass protests in energy field impeding normal investment Severe protectionism in Latin America and increasing strikes in recent years have led to significant uncertainties in trade cooperation. Over the past two decades since the entrance of Chinese companies in the Latin America market, a number of projects have encountered complaints, strikes and protests. According to incomplete statistics, four projects have suffered from demonstrations with large number of participants and significant impact. They are: a. Peru Block 1AB / 8 Oil Project (located in Andoas, Datemdel Mara Province, Peru) which was confronted with seven large-scale anti-China movements and caused huge losses to CNPC; b. Anaco Natural Gas Project in Venezuela, which is jointly developed by Petróleos de Venezuela, S.A. (PDVSA) and CNPC and managed by CNPC, suffered from three strikes; c. Agua Zarca Hydroelectric Project in Honduras where in the end, Sinohydro terminated the contract with the Honduras Company and withdrew from the project on August 24, 2013; d. Libra Deep Sea Oil Field Project in Brazil. As Brazilians opposed the sale of concession to foreign oil companies, the joint venture that included CNPC, gave an 8.56 percent pay raise to staff to quell opposition. 5 | Local unions and international NGOs becoming the “heel rope” for Chinese energy companies’ investment in Latin America As a political force, unions in Latin America play an increasingly influential role in national politics. During the period of military regime or one-party rule, government usually takes two kinds of measures towards work unions: suppressing them or ruling over them in the form of corporatism. Due to the support and protests by several international NGOs including Amnesty International and Rights Action, the Chinese company dropped out of the project. Work unions and NGOs have developed into an important source of votes in electoral politics. Therefore, Chinese companies are left with no choice but to shift the focus of management to negotiation with work unions and NGOs.

Suggestions on development

1 | Properly handling relations with the United States As Donald Trump has come into power and the shale gas revolution in the U.S. has massively increased domestic production, U.S. oil imports from Latin America have dropped sharply, creating new opportunities for Sino-Latin America energy cooperation. However, America’s energy investment climate is clearly superior to that in the Latin American market, although in terms of cost benefit, the Latin American market enjoys greater advantage. While deepening energy cooperation with Latin American countries, China should cautiously deal with its relations with the U.S. 2 | Actively exploring new modes of cooperation In their localization development, energy companies should seek greater acceptance by local public, avoid cooperation barriers and explore new modes of cooperation. For example, China has signed the loan-for-oil agreement with Brazil. China can facilitate Sino-Latin America energy cooperation by purchasing stakes of local oil companies and investing in new petrochemical factories in the region. The cooperation not only will provide more jobs to local people and increase government tax revenue, but also protect the local environment. In addition China should build smelting and processing projects acceptable to local conditions, work to upgrade the Latin American economic system and actively explore a new cooperation model based on both sides desire to maintain stable and long-term energy cooperation. 3 | Establishing an emergency mechanism China and Latin America are physically far apart and have different cultural, political and economic backgrounds. China must enhance its study of the politics, laws, and social customs of Latin American countries, acquaint themselves with local investment climates in a sophisticated way, strengthen risk awareness, and build an emergency mechanism. Meanwhile, we should fully respect local customs and religion, thus creating mutually beneficial and win-win cooperation. 4 | Increasing investment in renewable energy In 2013, 54 percent of energy in the region as a whole came from renewable energy while 90 percent of Uruguay’s energy is renewable. How can we take full advantage of new energy policies issued by Latin American countries to increase our investment in this field? China and Latin America can intensify cooperation in solar energy, which enjoys a great market in Argentina, Chile, Peru, Costa Rica and other countries. Recent years have seen greater national guidance on renewable energy. Two-thirds of the countries of Latin America have formulated clean development mechanisms, and one-third have issued renewable energy development strategies. For these reasons renewable energy will be the focus of investment by China. 5 | Reinforcing enterprises’ social responsibility and implementing the human-resource-localization strategy Investment in Latin America must go hand in hand with improving local people’s livelihoods, thus reducing the impact of negative reports by western media and NGOs. China should adopt policies such as tax relief to encourage energy enterprises to allocate appropriate amount of profits to give back to local communities and give financial aid for infrastructure construction, livelihood projects, and charity and welfare undertaking, all of which urgently need to be done by the Latin American governments and the public. By hiring local talent, Chinese companies can accomplish the localization strategy to the highest degree, reduce cultural barriers with local communities, and effectively ease the impact of social risks generated by security problems, ethnic conflict and class contradiction on Chinese companies.