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China's Growing Interest In The Latin American Energy Sector

China's Expanding Involvement in the Latin American Energy Sector

Analysis

JULY 25, 2013 | 0549  Print  Text Size 

Chinese Vice President Li Yuanchao (L) with Venezuelan Vice President Jorge Arriaza in Caracas on May 16.(JUAN BARRETO/AFP/Getty Images)

Summary

Ecuadorian Vice President Jorge Glas announced July 6 that one of China's state-owned oil companies, China National Petroleum Corp., will take a 30 percent stake in Ecuador's $12.5 billion Refinery of the Pacific, which will have a refining capacity of 300,000 barrels per day. The announcement is the most recent manifestation of a trend that has slowly unfolded over the past decade. China's originally simple relationship with Ecuador and Venezuela, primarily involving oil-for-loan agreements, has morphed into much more complex relationships involving investments throughout the energy production process, from financing to production to refining. Because these deals satisfy Beijing's overseas energy strategy, as well as Quito's and Caracas' own strategic imperatives, this already close cooperation is likely to expand in the years to come.

Analysis

China has become a major importer of oil, and with its domestic oil consumption doubling over the past decade, it is highly exposed to fluctuations in the global energy trade. To mitigate the effects of these changes, the Chinese government, operating through its state-owned oil companies -- primarily China National Petroleum Corp. and China Petroleum & Chemical Corp. (often referred to as Sinopec) -- has taken a number of opportunistic measures to guarantee that domestic demand is satisfied in a way that ensures at least a modicum of control and stability.

Chinese companies have invested in many of the Western Hemisphere's major oil-exporting countries, from Canada to Colombia, but their involvement is most robust in Ecuador and Venezuela. As a result of those countries' interventionist economic policies, they have been downgraded in international capital markets and pay a premium to borrow. Due to perceived risk, they have also fallen out of favor with many companies looking to invest overseas. As investment dried up, production stagnated and fell. As these countries searched for capital, China filled the void, taking advantage of opportunities not present in more crowded, reputable markets.

While its involvement in each country is unique, China uses similar tactics in both countries. These tactics shed light on China's strategy and the future development of the relationships.

Oil-for-Loan Agreements

China's foray into both Venezuela and Ecuador began with commodity-backed loans. China essentially bartered financial liquidity for guaranteed supplies of oil. Though other financiers were wary, China hedged the risk by denominating repayment not in fiat currency, such as the dollar or the bolivar, but in a raw commodity in which these countries are well-endowed and whose price is set by market forces and not by bureaucrats. Moreover, it made these loans relatively small and short-term, with renewal predicated on fulfilling the terms of the earlier tranche. So if either of these countries violated the terms, the downside risk to China was limited.

Both Venezuela and Ecuador have responded favorably to this mechanism. Since 2008, China has extended nearly $36 billion in oil-backed loans to Venezuela. In exchange, Venezuela has increased its shipments of oil and fuel oil to China tenfold, from around 50,000 barrels per day in 2005 to around 500,000 bpd in 2012. Since 2009, China has lent Ecuador around $8 billion. In exchange, Ecuador has begun sending oil to China. While in 2012 Ecuador sold only 5 percent of its exports to China, the loans are beginning to accumulate, and Ecuador will need to send record amounts of oil to Chinese firms. Indeed, according to Ecuadorian daily newspaper Hoy, by late 2012 more than 70 percent of Ecuador's future oil exports had been committed to China. This reported figure is likely a bit of a stretch, but it reflects the magnitude of the loan agreements.

While both countries can continue to reallocate oil shipments away from the United States to expand exports to China in the short term, this tactic is inherently limited if declining or stagnating production levels are not addressed. If production continues to fall while consumption rises, exports will fall and each country will have limited ability to take on additional loans.

Upstream Activities

In addition to its commodity-backed loan portfolio, China has also recently begun purchasing stakes in upstream exploration and production projects. Its main motivation for doing this is to hedge against increasing imports and price fluctuations by owning a stake on the production side. Another likely reason is to bolster oil production in countries to which it has loaned. Additionally, China's oil companies, particularly China National Petroleum Corp., have a lot of experience and expertise in heavy oil extraction and can leverage those skills to economically extract oil in Ecuador's and Venezuela's more challenging fields. 

China's activities in Venezuela's and Ecuador's energy sectors began to expand noticeably in 2007, when China National Petroleum Corp. and Petroleos de Venezuela began to form a number of joint venture companies to produce oil in the Orinoco Belt. Currently, they have four joint ventures -- Petrolera Sino-Venezolana (formed November 2006), Petrozumano (formed November 2007), Sinovensa (formed February 2008) and Petrourica (formed December 2010). The latter two operate throughout the Orinoco Belt, in the Carabobo and Junin divisions, respectively. Since 2008, China National Petroleum Corp. has increased production at Sinovensa from zero to around 140,000 bpd, and it now intends to increase it to 330,000 bpd by 2016. Additionally, the Petrourica joint venture is still in the exploration phase and could begin producing oil in the coming decade.

Similarly, in Ecuador in 2006, China National Petroleum Corp. and Sinopec created a joint venture called the Andes Petroleum Co., and through its subsidiary PetroOriental, began operating three blocks -- the Tarapoa block and blocks 14 and 17. Together, these three fields produce roughly 50,000 bpd. The joint venture also holds a 36.26 percent share in the country's second-largest pipeline, the Heavy Crude Pipeline.

Downstream Activities

As oil-for-loan deals and upstream production have increased, China has entered into deals with each country to build up refining capacity, both at home and in the region. China currently has a limited ability to refine more than a few hundred thousand barrels per day of Latin American crude, an amount that is quickly becoming insufficient. Moreover, much of this refining capacity is provided by smaller independent refineries, which Beijing is attempting to close or consolidate.

In May 2012, China broke ground on the400,000-bpd Guangdong refinery, which is a joint venture between China National Petroleum Corp. and Petroleos de Venezuela and will likely provide the financing to finally guarantee the future of the 300,000-bpd Refinery of the Pacific. With a 60 percent stake in the former and a 30 percent stake in the latter, China will have much more bandwidth to increase the oil trade with Ecuador and Venezuela, signaling that cooperation is likely on the upswing. But given that these two projects are still in their infancy, it will likely be at least several years before these refineries come online.

What began as a lucrative business opportunity for Beijing is now becoming a much more robust strategy. Not only will China continue to get guaranteed supplies of oil on favorable terms, it will also get a slice of the profits from the production and refining of that oil.

This involvement also has enabled the governments in Caracas and Quito to achieve their own strategic imperatives. With a steady flow of liquidity, these governments can maintain high levels of social spending without having to increase fiscal revenue. This arrangement will also help these countries increase oil production and refining capacity -- an issue of great national import.

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A Great Little Novel About The Dirty War in Argentina

I am a survivor of two military governments-Peru and Brasil during the 1970's. Peru's military government was benign with more intimidation than actual violence. Brasil's military government did some violent things but a lot of people were merely sent into exile. I only personally knew of one person who disappeared in Brasil in 1970. Elena lived through the military government in Argentina. It was monstrous. It could be compared to the reign of terror of the Nazis. Over 30,000 people disappeared. Children were robbed from their parents and property illegally taken on a grand scale.

It is hard to come to terms with what we lived through. When I go to Argentina the thought always goes through my mind as follows: "How could such nice and civilized people had done such terrible things?"

I just finished reading a charming little novel translated from Spanish with the title "My Father's Ghost Is Climbing In The Rain." It is by a 38 year old Argentine writer named Patricio Pron. This book touched my heart. It showed me all of the conflicts and pain of the young people who grew up after that horrible time and had to come to grips with the horrors that their parents lived through.

IMF Supports Argentina In Debt Dispute With Dissident Bond Holders

July 24, 2013 6:02 am

IMF pulls support for Argentina’s Supreme Court appeal

By Jude Webber in Buenos Aires

The International Monetary Fund has pulled plans to support Argentina’s push for a US Supreme Court review in the country’s court battle with creditors.

Christine Lagarde, IMF managing director, withdrew her recommendation that the fund file an amicus curiae brief in support of Argentina. The IMF said she took the decision after the US made clear that it would not support the move.

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• Challenge to IMF efforts in Argentina bond drama
• Comment Argentina’s bondholders deserve their day in court
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• Argentina files appeal to Supreme Court

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A US court last year ordered Argentina to pay $1.3bn to a group of investors who had refused to accept a debt restructuring following the country’s default in 2001.

Last month, Argentina asked the Supreme Court to review the case as it continues its dispute with the creditors led by Elliott, a US fund. It came amid anticipation of a separate ruling on the case by a New York appeals court that could tip Argentina into a new technical default.

The IMF’s planned intervention was driven by concerns about the implications for future sovereign restructurings, although some experts argue that Argentina’s case is so unusual that there would be no knock-on effects.

The original plan to file an amicus brief had raised eyebrows, given the IMF move in February to censure Buenos Aires over its faulty statistics, and Argentina’s open hostility towards the IMF, which it accuses of prescribing the policies that led it to ruin.

The IMF spokesperson said it would not have been appropriate to proceed without US support, but added that the international organisation still maintained concerns.

“The fund remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt restructuring process in general.”

One person familiar with the case said Washington appeared to be backing the IMF move as late as Monday. The US Treasury gave no reason for the apparent U-turn.

The Treasury said the Obama administration agreed with the IMF position that if the Supreme Court upheld the previous court ruling against Argentina, it could adversely affect other sovereign restructurings. But they said the US disagreed with Argentina’s failure to settle with western creditor nations.

The “holdout” creditors had lobbied Ms Lagarde to cancel the planned submission to the Supreme Court.

In a letter seen by the Financial Times, Michael Spencer, an attorney with Milberg, which is representing several hundred individual investors from Argentina, Italy and 17 other countries, appealed to Ms Lagarde “not to take this unprecedented and gratuitous step”.

In another letter, Gibson Dunn, the law firm representing Elliott, said any attempt to call IMF intervention neutral was “simply disingenuous”. It said the move would encourage more countries to litigate and ultimately lead to “fewer rather than more successful consensual restructurings”.

Additional reporting by Robin Harding in Washington

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Gonzalo Lira Says: "If You Are A Baby Boomer, You Will Go Bankrupt If You Stay In America"

If You Are A Baby Boomer, You Will Go Bankrupt—If You Stay In America

Recently (drum roll, please) I had a tooth removed (cymbal crash!).

Unlike us, he’s got no worries—
he can afford a good gerontologist. 

But I live in Chile. So I wound up paying $62 for the extraction of a cracked rear molar, and an additional $450 for a state-of-the-art implant with a porcelain crown that ought to last me the rest of my life. This was done at a fancy-pants private dental clinic, with the latest equipment and some very hot nurses, lemme tell ya. I practically looked forward to going! (Don’t tell my wife. Please.)

Meanwhile, a friend in Texas, with nearly the identical problem, wound up paying $2,000 for the implant, and an additional $1,500 for the crown—almost 8 times what I paid. I told her it would have been cheaper—substantially cheaper—for her to fly down to Chile, stay at a nice hotel, and get the procedure done here. She thought I was kidding—until she compared the costs of the procedure, added the airfare and hotel costs, and then realized that I was right. (If you don’t believe me, check out the American Airlines website and the Holiday Inn website for yourself, then do the math.)

Another example: My 89 year-old grandmother has senile dementia, so she requires round-the-clock nursing care. Her cost? Here in Chile it’s about $1,500 per month—and this is private nursing care through a professional agency, with fully acredited RN’s taking care of her day and night in her own home. In the U.S.? The cost for the same quality of care would be between 5 and 10 times as expensive, if not more.

Now, I’m not bringing up these examples because I’m working for the Chilean ministry for tourism—I’m not. I’m giving these examples in order to highlight something crucial about globalization.

Globalization has meant that labor costs are much cheaper outside the developed world. A factory in China will produce a doodad at a small fraction of what it would cost to produce in America or Europe. Which is great, if you want to buy that doodad.

But globalization has also meant that the care and services required for older people are much cheaper outside the developed world—and prohibitively expensive in the U.S. and Europe.

Which is a disaster for retirees in America. Because if you are a retiree—or if you are a Baby Boomer who will soon be retiring—then you live on a fixed income: Be it a pension or Social Securitychecks or an annuity or some combination thereof. So if you live on a fixed income, and the price of health care (or health insurance) is continuously rising, then it is a certainty that you will go bankrupt before you die.

Pretty much sucks, yeah? Here’s why.

America is a demographic timebomb. According to the Population Reference Bureau, there are 72 million Baby Boomers alive in the United States today. That is, the 76 million that were born between 1946 and 1964, minus the approximately four million members of this generation who have so far died. As of this year, 2013, those 72 million people are aged between 67 and 49—and they represent almost a quarter of the total U.S. population.

Baby Boomers have begun to retire—and they are already having powerful effects on Social Security. As of 2011, the ratio of retirees to workers was 35 per 100. By 2030—when Baby Boomers will be between the ages of 84 and 66—the ratio will be 49 per 100. Social Security will be unsustainable—retirees will be receiving fewer benefits (i.e., less money) as more and more Boomers retire and demand their SS checks, while fewer and fewer workers contribute to Social Security.

(And by the by: The is no such thing as the “Social Security Trust Fund” or the “Social Security Lockbox” or any other such balderdash. Social Security is essentially a pyramid scheme, whereby new participants pay for the older participants. And as everyone knows, a pyramid scheme works great so long as there are ever more people joining the pyramid and contributing. But once the demographic base narrows—as it did following the Baby Boomers in 1964—there are fewer people left to pay the older players. Which is what’s happening to Social Security. Which is why Boomers will get far less than their elders, and far less than what they actually contributed over the years.)

On the other hand, the effects of aging and retiring Baby Boomers on health care costs are already catastrophic—and they will get much, much worse as the generation ages. An older population means more sick people. More sick people means more demand on health care resources, which of course drives up costs. And we are seeing this in the aggregate health care costs in the United States: Those costs rose “only” 4% in 2012 after adjustment for inflation. The year before, they rose 6.7%. Next year (2014), many experts predict costs will rise by nearly 7%. These numbers will only get worse as the 72 millions Boomers go through the aging process all at the same time.

So, rock? Meet hard place: Baby Boomers will receive less government retirement money, even as health care costs will rise, as ever-increasing numbers of Baby Boomers make more and more demands on the American health care system as they grow older and sicker.

This situation of less retirement money and higher health care costs is inevitable. It is a function of demographic reality: Too many Baby Boomers who will get sick, and not enough working, taxpaying Americans to pay for their care.

Which leads to the following, inevitable conclusion: Every Baby Boomer who gets seriously ill after retirement—but does not die—will likely go bankrupt.Every single one.

You know those horror stories about retirees who lost their businesses over a bout of appendecitis, or lost their homes because of a routine colonoscopy? A few years ago, those stories were reserved for an article in USA Today: A modern-day tragedy, my oh my. But now, these stories are happening to people we know. In some cases, they are happening to people we love. And in some cases—ever increasing number of cases—these stories are happening to us.

You have to be realistic about the situation. It doesn’t help to loudly claim that “American health care is the best in the world!”, and then stick your head in the sand until you’ve lost your home and all your money because of the spiraling costs of health care in America. And as to why this situation is as it is, the answer is academic. There is more than enough blame to go around, so assigning it is relatively pointless.

What matters is what to do about this situation. How to dodge the bullet, and get the health care you want without going bankrupt. You have to look at the situation, and figure out what’s right for you.

This is what I think:

If you are a retiree, or close to retirement, it is insane to continueliving in the United States. You will go bankrupt if you do.

Therefore, take advantage of globalization: Leave the United States, and go to where medical care is cheaper.

Going back to the example of my friend in Texas: She paid over $3,500 for a tooth, while I paid less than 13% of that cost. In other words, I got an 87% discount—because I was not living in America, and so did not have to pay the outrageous prices of American health care.

If you could get an 87% discount on your health care, would you take it? Or would you deliberately stand pat, pay 100%—and go broke?

The answer is obvious. So if you cannot afford health care in the United States—or realize that, in the not-too-distant future, you won’t be able to afford it—then the smart move if you are living on a fixed income (or will be soon) is to try to look for a place where health care costs are manageable. A place where you can receive your pension or Social Security check or annuity or whatever, and yet not be afraid that you are one medical emergency away from losing your house and all your money. A place where you can take advantage of globalization, and get the best medical care at the best price.

At my Strategic Planning Group, I have a Scenario called “Exit America”. In it, I discuss how to leave America (or Europe), and find a new place that’s right for you. I do not claim that there is some Eden out there where everyone can just go and be happy—there is no one-size-fits-all Shangri La. That’s because everyone is different, and so different people have different priorities—different things and situations and environments that make them happy. Which in turn means that “Eden” is different and unique for each one of us.

Therefore, in the Scenario, I outline a strategy to find a country that’s right for you. I explain how to figure out your priorities, then start looking for a place that satisfies those priorities, while at the same time giving you practical knowledge and insights into how to exit America.

When I started the Scenario, I had in mind people who wanted to leave America because of political or philosophical reasons, as I did. In my own case, I had become dismayed by the police-state mentality that has creapt into American life following 9/11, which finally made me want to leave.

But now, it’s becoming increasingly clear that one of the main reasons to leave the United States is because of the economics of retirement.

The flood of retirees that will hit America will make life unaffordable for people over 60 in the near-term future. Therefore, unless you are insanely rich, it is inevitable that you and the vast majority of your Baby Boomer peers will go broke because of health care costs, as I explained above.

So if you are a Baby Boomer, the smartest thing you could do is leave the United States now, while you’re still healthy enough to do so, and move to a country where quality health care is affordable. A country where your fixed retirement income will be enough to pay for good medical care without bankrupting you. In short, anyplace but America.

A final thought.

Have you ever seen a bankrupt elderly person? Have you ever met someone who is over 70, who cannot get any kind of a job, and who cannot start any kind of business? Have you ever met an older person who has no home, who has no assets, who has no income save for a small government check? They might get a few hundred dollars from the government every month—but will it cover their basic, necessary expenses? Will it be enough for shelter, for food, for medical care?

Probably not.

Now ask yourself: Do you want to be that person? Do you want to be making the choice between eating and taking your necessary medication? Do you want to be a person who scrambles to exist, but does not live? Because you will become that person, if you plan on retiring on a fixed income in America. One serious but non-fatal illness will break you, and leave you with nothing when you are at your weakest—guaranteed.

This is the inevitable outcome of the U.S. healthcare situation. Denying it is foolish, and trying to assign blame is a waste of time. The demographic reality cannot be denied. So if you are a Baby Boomer, and you do not want to be homeless and broke in your retirement years, your best shot is to exit America now—while you still can.

If you are interested in exploring strategies to leave America and find a country that’s right for you, go to my Strategic Planning Group’s Preview Page and check out the site.