[NGW Magazine] China strengthens ties with Latin America
This article is featured in NGW Magazine Volume 2, Issue 12
By Sophie Davies
China needs markets and industries overseas as part of its global expansion and is stepping in where US firms fear to tread.
China National Petroleum Corporation (CNPC) has said it will invest $2bn in Peru’s Block 58 as China continues to bolster its presence in Latin America. The head of Peru’s state energy agency Perupetro, Rafael Zoeger, said in May that the Chinese firm would invest in the oil and gas block for about six years, between 2017 and 2023.
CNPC, which was officially named operator of the block in 2015, released a development plan for the block earlier this year stating that it would drill a total of 60 wells there in 2017. The block, which is in Peru’s southern highlands in La Convencion province, contains an estimated 4 trillion ft³ of gas.
State-run CNPC has said that, from the third quarter of 2018, it plans to achieve an output of 400mn ft³/day of gas at the block. The Chinese firm, the country’s largest oil producer, acquired the block in 2013 as part of a $2.6bn deal to assume all the shares in the Peruvian subsidiary of Brazil’s state-run oil major Petrobras. The troubled state run giant sold the block as part of larger efforts to shed foreign assets in order to focus more on exploration offshore Brazil.
At the same time as acquiring Block 58, CNPC also gained Block 57 and Block X in Peru. The company said last December that it would also be interested in taking a stake in Peru’s $6bn Gasoducto Sur Peruano pipeline project.
CNPC has expanded its presence in Latin America in the last decade, as the energy-hungry nation tried to build up enough resources to meet rapidly growing demand. As well as Peru and Ecuador, CNPC has operations in Colombia, Cuba, Brazil, Costa Rica and Venezuela.
China’s energy demand has now slowed, but the ambitions of Chinese companies and banks in Latin America do not appear to have abated.
Since 2005, China Development Bank and China Export-Import Bank have provided more than $141bn in loan commitments to Latin American and Caribbean countries and state-owned firms, according to data from the China-Latin America Finance Database, a joint effort between Boston University and the Inter-American Dialogue, a Washington-based think-tank.
In 2009, Peru received a $50mn loan from China Development Bank in order to finance energy, environment, infrastructure and transport. “China and Peru have traditionally had one of the strongest bilateral relationships in Latin America,” Margaret Myers, Director of the China and Latin America Programme at the Inter-American Dialogue, told NGW. There have been a lot of discussions about new and enhanced collaboration between the two countries, she said.
“Chinese investment is very welcome and generally received very positively by the population despite some challenges in the mining sector,” she added.
However, oil and gas projects can be a very sensitive issue from the point of view of the community – both civil society and indigenous groups – and there have been challenges to Chinese investment during public tenders, she cautioned. “Chinese investment has not been without controversy and there will probably continue to be some sensitivities over this,” she added.
If anything, China’s investment in Latin America has increased in recent years in spite of lower energy demand growth rates in both the US and China, Myers noted.
There has been an increased focus on growth in Latin America in the last three or four years since Xi Jinping has been president, with the Chinese government preparing new policy papers that didn’t exist before, she said. Beijing’s main driving factors for growth in Latin America are resource acquisition, the internationalisation of Chinese firms and the creation of export markets for Chinese goods, she added.
Eventually, she said, Latin America could become part of China’s One Belt, One Road initiative – an effort to create the world’s largest platform for economic co-operation. Xi Jinping proposed the One Belt, One Road initiative in 2013, as a modern-day equivalent to the Silk Road. The proposed initiative would create a network of railways, roads, pipelines, and utility grids linking China with other parts of the world, but also promote policy, trade and financing collaboration.
Latin America, for its part, is more open to Chinese financing because leaders have recognised the importance of diversifying their contact with countries other than the US, which has traditionally been an important investor in the region, Myers said: “After the global financial crisis it became readily apparent that relying too much on the US is not the best idea. With the Trump administration there is a degree of concern in Latin American countries, especially Mexico but also elsewhere, about the reliability of the US and whether it will continue to engage with the region in a productive way.” Peru in particular has needed to be open to non-traditional investors for the last decade or so due to the challenges it has faced maintaining the participation of some foreign players in its energy industry. At a time when Chinese investment has been growing, several foreign majors have either exited projects or abandoned the Andean nation entirely, citing bureaucratic delays including lengthy waits for drilling permits.
As well as Petrobras, Canada’s Talisman Energy has quit Peru completely while US major ConocoPhillips and Canada’s Pacific Exploration and Production Corp have ditched projects. Companies operating in Peru complain not only about the slow pace of projects but also about the complications posed by conflict with indigenous communities.
Against this backdrop – coupled with pressure on the economy from the drop in global oil prices – Peru has needed to turn to investment from new creditors like China, even if critics talk of the potential damage that involvement with China could be doing to transparency in the country’s oil industry. For the cash-strapped industry, Chinese deals hold the promise of opening up the sector internationally and thereby potentially leading to greater foreign direct investment from elsewhere.
President seeks partners for Paraguay
UK President Energy has appointed specialist global oil and gas adviser Envoi to help market farm-outs of its interests in the Pirity and the Hernandarias basins in Paraguay. President’s management estimates that its Paraguayan prospect and lead portfolio identified to date “contains a combined mean unrisked prospective resources net to President of 3bn barrels of oil equivalent, including 10 trillion ft³ of gas resources and 300mn barrels of drill-ready oil resources in the extension of the light oil play proven by existing producing fields 30-70 km away across the Argentine border.”
Envoi said on offer are stakes of up to 50% for a strategic partner willing to fund its way into one or more of its acreage positions by initial contributions to the next wells planned in each of the Pirity and Hernandarias Concessions at a combined estimated gross cost of $24mn.
President said that the assets in the land-locked South American republic cover some 34,000 km² and benefit from extensive 2-D and 3-D seismic data as well as the two Paleozoic exploration wells drilled in 2014, which successfully identified the petroleum system with significant oil and gas shows. “During the last two years, further detailed geological and geophysical work has been conducted which gives strong support to President’s view as to prospectivity of its licence areas,” it said. Envoi said the assets were near gas pipelines in Bolivia and Argentina, where prices were relatively high, between $6 and $8/mn Btu.
President operates the Pirity Concession 100%, which lies on the Argentinian border close to its producing fields. President’s second well in the acreage, drilled in 2014, resulted in the Lapacho discovery from which hydrocarbons were recovered, proving the active Palaeozoic play system.
And it operates the Hernandarias Concession with 40% interest, with a right to earn up to 80%. It covers the northerly extension of the Palaeozoic play trend proven by the 2014 Lapacho well and contains numerous prospects and leads. These include a large drill-ready three-way dip anticline against a major bounding fault, estimated likely to contain up to 1.5 trillion ft³ resource potential in the Devonian and Silurian targets.