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China's oil loans run into trouble

China extended much credit to secure oil supplies. Now it needs borrowers to start repaying

China's policy banks are caught in a cleft stick as some of their massive loans to boost offshore oil flows run into trouble because of political and economic problems in recipient countries. In the wake of the collapse in crude prices, lenders such as China Development Bank (CDB) and Exim-Bank are pouring good money after bad.

In its decade-long efforts to mitigate domestic disruptions in the supply of crude with higher flows from abroad, Beijing has pursued two different investment techniques. In one, the deep-pocketed policy banks have swapped infrastructure-targeted debt in exchange for exports of crude back to China, almost exclusively by those nations' state-owned producers. In the other, China's own state-owned oil companies have been financed into upstream investments offshore.

By 2015, these arrangements were delivering around 2.2m barrels a day of crude, significantly reducing China's vulnerability. But the collapse in oil prices has, as the Oxford Institute of Energy Studies (OIES) points out in a definitive report in December, "complicated the picture". Output in crisis-hit Venezuela is in decline. Ecuador, whose state-owned Petroecuador produces a type of crude that is largely shunned by Chinese refiners, is struggling to maintain agreed production levels. And in China's other main offshore investee-countries, like Iraq and Angola, the fall in oil revenues—and Opec cuts—pose a threat to the very oil output that provides income to repay the debt.

China's other infrastructure-based offshore loans in support of the "one belt, one road" (Obor) project are also starting to attract scepticism. In late January, ratings agency Fitch expressed concern about whether these loans will ever be honoured, citing the low sovereign rating of some of the recipient countries. "The lack of commercial imperatives behind Obor projects means that it is highly uncertain whether future returns will be sufficient to fully cover repayments to Chinese creditors," it said in a report.

But with so much capital in play, China can hardly back out now. "After investing so heavily, Beijing has few options but to maintain support for these countries in a bid to sustain oil production, at least enough to ensure loan repayment and equity output," points out the OIES.

Brazil is a good example. In April 2016, China Development Bank had little choice but to agree a fresh $10bn oil loan to cash-strapped and corruption-ridden Petrobras after overtures by the latter. Another $6bn credit is on the table.

Brazilian supply boost

Although China may not have intended to pour so much money into Brazil, at least Petrobras is delivering the agreed quantities. In the first half of 2016, imports from Brazil reached 340,000 b/d, a rise of 130,000 b/d over the first six months of 2015, according to Chinese customs data. And to compensate for lower global oil prices, Brazil has recently boosted shipments to China.

Despite the mounting uncertainties over the value of their oil loans, China's policy banks certainly aren't tightening the purse strings. For instance, they are continuing to fund a major play in Iran where, according to Iranian media, they have agreed $1.3bn for the refurbishment of the Abadan refinery in the southwest of the country, with another $1.7bn loan to be made available later this year. Much of the work at Abadan, Iran's oldest refinery with a current capacity of 350,000 b/d, will reportedly be done by Sinopec.

Despite the mounting uncertainties over the value of their oil loans, China's banks certainly aren't tightening the purse strings

And despite Venezuela's failure to meet its contractual obligations, China seems willing to continue its precarious involvement in the country's oil industry. In mid-February, China agreed no less than 22 deals that, according to president Nicolás Maduro, will cost around $2.7bn. These include a contract to increase heavy crude production at Petrolero Sinovensa, the development of the Petrozumano joint oil and gas venture, and a pilot project to test a new well as part of the Petrourica project.

The CDB will fund all these programmes. Although Maduro characterised the deals as heralding "our country's economic recovery", it looks as though the price China is extracting is a tighter grip on the country's oil industry.

Meantime, the condition of the loans to Venezuela deteriorates by the day. State company PdV has fallen months behind agreed delivery schedules.

Overall, unless global crude prices rise, more and more of China's oil loans are looking a poor bet. As the OIES points out, "despite the billions invested in global oil markets, China still relies on Russia, Saudi Arabia, Iraq, Angola, Oman and Iran for two thirds of its imports".

China has at least got some value from this avalanche of credit. Because it also acquired upstream assets—notably in Russia, Iraq, Iran and Angola—rather than just buying oil, it now produces some of the oil it imports from offshore.

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