WikiLeaks: China looks elsewhere for energy

China should tread lightly in South America in its search to fulfill energy needs and avoid the pitfalls of the Gulf.

China gets most of its Gulf oil from Saudi Arabia - 1 million barrels per day to be exact [EPA]

New York, NY – Though the so-called “cable gate” scandal has largely vanished from public view, revelations from classified US State Department correspondence continue to illuminate present day geopolitical dilemmas. Take, for example, mounting tensions in the Middle East and, specifically, the Persian Gulf. China, whose energy needs have grown by leaps and bounds, relies extensively on Iranian oil and views unfolding friction between the Islamic Republic and its enemies with increasing concern. In an effort to diversify its energy portfolio and avoid the pitfalls of the Gulf, China has sought out alternative sources of oil.

According to secret cables published by whistle-blowing outfit WikiLeaks, China is pursuing a “strategy of securing direct oil contracts around the world to reduce [its] reliance on oil shipped from and through hotspots such as the Persian Gulf and the Straits of Malacca”.

Ecuador wants money not to drill in Amazon

Though China’s big push into Africa and specifically Sudan has received a decent amount of media scrutiny, the Asian Tiger’s presence in South America has been largely overlooked.

According to WikiLeaks cables, however, China sees the Andean region as key in its drive to secure greater oil resources. As far back as 2006, the US Embassy in Quito, Ecuador, noted that China sought to become a “major player” in the Ecuadoran oil industry. Almost overnight, diplomats noted, “Quito is playing host to a steady inflow of managerial, financial and technical representatives of China’s major and minor oil companies.” 

Indeed, the Americans remarked, “the overseas arms of three major Chinese oil conglomerates [including the China Petroleum Company or Sinopec as well as the Sinochem Corporation]… are present and have ongoing operations in Ecuador.”

As China continued its drive into Ecuador, the Asian Tiger’s major service arms acquired valuable opportunities to increase their technical and managerial expertise. Furthermore, the Americans declared:

We assume that the dozens of Chinese petroleum engineers coming through Quito on temporary projects will take these lessons home, furthering China’s effort to create an integrated oil services company to rival Western companies like Schlumberger and Halliburton.

In a report to Washington, the diplomats added that Chinese oil companies operating in Ecuador were still directed by provincial and local governments back home, and “as China’s domestic oil exploration opportunities have dried up, these bureaus have attempted to sell their expertise overseas”. In addition to Ecuador, the US Embassy noted that China had plans to increase its oil presence in the neighbouring and volatile nation of Colombia. 

Oil logistics problem

For China, exploring oil in South America and other parts of the world has simply become a geopolitical imperative. Even as US oil imports are set to halve between 2000 and 2035, owing to rising domestic output from both conventional and shale fields, increased ethanol blending and improvements in vehicle efficiency, China’s oil imports are projected to surge up to 12 million barrels per day by the end of the same period.

Indeed, according to Goldman Sachs, China’s thirst for oil has become so voracious that the country will become the world’s largest petroleum importer by mid-2013. 

If hostilities should break out in the Middle East, this would prove particularly problematic for China as Beijing gets 50 per cent of its oil from the Gulf. Iran has warned that it might block the Straits of Hormuz – the only way out of the Gulf by sea – if the West prevents it from selling its oil. The role of the Straits cannot be understated – every day, an average of 17 million barrels of oil pass through this crucial area aboard tankers.

China gets most of its Gulf oil from Saudi Arabia – 1 million barrels per day to be exact. However, Beijing also relies on Iran for 11 per cent of its oil, and China is the largest buyer of petroleum from the Islamic Republic.

As far back as 2004, Sinopec signed memorandums of understanding with the Iranians to develop the Yadavaran oilfield, containing 3.2 billion barrels of oil. Five years later, China inked billions of dollars worth of contracts to help expand Iranian oil refineries, and Sinopec has continued to play a key role in developing Tehran’s hydrocarbon resources. 

Chinese leaders are hardly unaware of the need to find an alternative to their oil logistics problem. More than a decade ago, they decided to reduce the proportion of petroleum imports carried by tanker because of the vulnerability of shipping lanes from the Persian Gulf. From a technical standpoint, however, the solution to China’s transport dilemma isn’t very straightforward. 

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In 2009, Beijing commissioned a gas pipeline from its western province of Xinjiang and running through Central Asian republics to Turkmenistan, itself linked by gas pipeline to eastern Iran. At present, however, Russia is the only country amongst China’s top oil suppliers which ships petroleum to Beijing via overland pipeline.   

The ups and downs

Given these overall constraints, it is not a surprise that China has turned to other regions of the globe such as Africa and South America to fulfill its energy needs.  Ecuador is now shipping a growing share of its oil exports to Beijing, which has secured a fixed petroleum supply in exchange for loans from the China Development Bank. The Andean nation, which was in dire need of financing after defaulting on some of its bonds back in 2008, agreed to export 3 million barrels of crude per month to China the following year. 

Seeing opportunity, China then became poverty-stricken Ecuador’s chief source of external finance and invested heavily in the Andean country. By 2011, Beijing was taking in more than half of tiny Ecuador’s oil exports, and Quito agreed to ship 130 million barrels of crude to China over a six year period. 

For the Chinese who find their way to South America, Ecuador is like a new frontier: according to WikiLeaks, oilmen share communal apartments and leave their families back in China “because Chinese educational options for their children in Ecuador are non-existent”. 

Doing business in Ecuador has been a rodeo for the Chinese, who must contend with an increasingly more nationalistic Rafael Correa government intent upon sucking up all the oil revenue that it can. As if that were not troublesome enough, Chinese companies and diplomats “openly complain about the corruption and difficulty of doing business in Ecuador”. In addition, Chinese oil companies which do business in the restive Amazonian theatre “reportedly face periodic indigenous unrest”.

The Chinese also face difficulties in neighbouring Colombia, where just this year Sinochem bought up assets belonging to French oil company – Total – worth approximately $1 billion. In a further development, the Chinese acquired a stake in the Cusiana oilfield and local pipelines.

Colombia, a country which is currently in the midst of an oil boom, saw its output of crude double over the past six years, up to nearly a million barrels per day in 2011. As exploration pushes into the country’s eastern lowlands, however, the oil companies have faced serious security problems.

Indeed, Sinochem’s British subsidiary, Emerald Energy, has confronted repeated attacks by FARC guerrillas on its Ombú field in the provincial state of Caquetá. When Emerald reportedly refused to pay the FARC $10 a barrel extortion tax, the guerrillas kidnapped three Chinese workers on company staff.

New gringos?

Facing an uncertain political milieu in the Middle East and the threat of war in the Persian Gulf, not to mention an increasingly assertive US intent on patrolling sea lanes and projecting its military and naval power in the East Asian theatre, China has been forced to recalibrate its geopolitical and energy strategy. In the course of pushing into South America, however, China risks being perceived as a manipulative foreign interloper.

In the twentieth century, many South Americans came to resent the interference of Nelson Rockefeller and the Standard Oil Company of New Jersey. In the 21st century, however, it may very well be Sinochem or Sinopec which raises the ire of Ecuadorans or Colombians. 

China turns to Middle East for oil

As I’ve noted before, Beijing faces a public relations battle in the region. According to WikiLeaks cables, local residents view Chinese businessmen as “locusts” intent on “extracting minerals and natural resources and leaving very little of lasting value behind”.

Chinese workers, meanwhile, have a “different work ethic” from their Latin American counterparts, and as a result, many companies choose to import their own labourers which had in turn fed “local resentment”. Colombia meanwhile is reportedly “wary of Chinese motives”.

Speaking to the US Chargé d’Affaires in Beijing, Colombian businessmen expressed their concern that China might “walk all over” their country and its people much as the Asian powerhouse had done in Africa. In particular, the Colombians are wary of Chinese investment in the hydrocarbons sector given the Asian Tiger’s awful track record on environmental and labour practices.

Acutely aware of its image problem, China has lent more to Latin American governments than both the World Bank and Inter-American Development Bank. According to the Guardian of London, a large proportion of Chinese finance is packaged with oil-sale contracts known as “commodity backed loans”.

Under the deals, nations would agree to ship hundreds of thousands of barrels of oil to help repay debts. Though it all sounds reminiscent of US bullying and business as usual as practiced by large international financial institutions, the Guardian believes that China isn’t exactly behaving like the imperialist powers of yore. 

“Contrary to claims that China is making windfall profits,” the paper writes, “the country buys a pre-specified number of barrels of oil each day and pays spot prices on the day of shipment… The oil-sale agreements allow China to give loans to otherwise non-creditworthy borrowers by reducing the risk of borrower default.”

The Guardian adds that the deals “appear to be win-win for China and Latin America. They allow China to put dollar reserves to productive use, expand the usage of the Chinese yuan and secure oil. For Latin America, especially its less creditworthy countries, Chinese banks offer a new and large source of finance. Also attractive is that Chinese finance does not come with the infamous ‘conditionalities’ that accompany western finance.” 

On the other hand, the paper admits that China is fuelling commodity-led growth which has “never proven to be sustaining, nor is it sustainable”. “The environmental consequences of commodity-driven growth are alarming,” notes the Guardian, “and our research shows that China’s banks require very little in the way of environmental monitoring of such loans.”

In its search to fulfill its voracious energy demands and avoid the pitfalls of the Persian Gulf, China will have to tread lightly in South America. If it doesn’t, Beijing could fall under pressure by restive populations and nationalistic governments. It’s a difficult lesson that the US has had to learn, and one which may be a bitter pill to swallow for the Chinese newcomers.

Nikolas Kozloff is the author of Revolution! South America and the Rise of the New Left and founder of Revolutionary Handbook.