China builds energy ties as US imports slow
With growing US production, imports are slowing down in North America. China is becoming more prominent where the US is pulling back
For energy-rich countries in northern Latin America and the Caribbean, the US has long loomed large. It has been the primary customer for oil and gas exports and US companies have pumped billions of dollars into the region to explore and develop oil and gasfields. But as US domestic production surges, and import demand falls, the region's energy relations are changing, and countries are looking beyond the US for markets and investment dollars.
More often than not, those countries are looking to China. The country has been keen step in where the US is pulling back to help secure its energy needs, and its chequebook diplomacy is making it an increasingly important player in the region.
China's rising prominence was on display in early June as China's new president Xi Jinping toured the region, making stops in Trinidad and Tobago, Mexico and Costa Rica. Xi pledged billions of dollars in investment and development assistance during the trip and oversaw the signing of a series of agreements that will see Chinese companies help develop major projects throughout the region.
The first stop on Xi's trip was Port-au-Prince, the capital of Trinidad and Tobago. The countries do not have strong bilateral relations - Trinidad and Tobago does not yet have an embassy in Beijing, though it plans to open one in November - but both are keen to see that change. Trinidad and Tobago needs new customers and investors in its energy sector and China has been bolstering relations with energy-rich countries around the world.
As recently as 2004, more than 95% of Trinidad and Tobago's liquefied natural gas (LNG) exports went north to the US. But as US shale-gas production has surged and many of the LNG import terminals that dot the US Gulf and east coasts have been idled, Trinidad and Tobago's flagship Atlantic LNG project has been forced to seek new markets. Last year, less than 20% of the country's 19.1 billion cubic metres of LNG exports went to the US.
Many of Trinidad and Tobago's LNG cargoes are now going south to Argentina, Brazil and Chile. The country, though, has also started sending LNG to Japan, South Korea and China, some of the most lucrative LNG markets in the world. And Trinidad and Tobago is keen to increase exports to Asia, and especially China where long-term demand is expected to be stronger, over the coming years. Trinidad and Tobago's shift to the east could accelerate later this decade after the Panama Canal is expanded in 2015 to accommodate larger LNG vessels and Atlantic LNG's initial wave of long-term contracts start to expire.
China's state-run companies' investments in Trinidad and Tobago's energy sector were also on the agenda during Xi's visit. State-owned companies China National Offshore Oil Corporation and Sinopec hold a joint interest in two offshore exploration blocks, while Sinopec holds interests on its own in two further exploration licences. China also gained a direct interest in the LNG sector last year when China Investment Corporation acquired a 10% stake in Train 1 of the Atlantic LNG plant.
China's largest investment in the country would have been a proposed project from Sinopec and Saudi Arabia's Sabic to jointly develop a $5bn methanol plant. The companies, though, dropped the proposal after failing to come to terms with the government, but the project could be revived.
The next stop on Xi's visit was Costa Rica, where the most significant deal reached was a $900 million line of credit from China Development Bank to help fund the upgrading and expansion of Costa Rica's largest oil refinery. The antiquated refinery near the Caribbean port town of Puerto Limon refines about 18,000 barrels a day (b/d). A $1.3bn modernisation plan put forward by Costa Rica's state-owned oil company Recope and state-run China National Petroleum Corporation (CNPC) would expand the facilities refining capacity to 65,000 b/d and improve the plant's fuel quality.
But Xi's visit was not enough quell the controversy surrounding the project. China often uses such financing deals to win lucrative construction and engineering contracts related to the project for Chinese companies, and the deal with Costa Rica was no different. But the strategy has been heavily criticised in Costa Rica.
The government halted the project just weeks after Xi's visit when an investigation by the Comptroller's Office found that the feasibility study for the project had been carried out by Huanqiu Contracting and Engineering Corporation, a CNPC subsidiary. That, the investigators said, was a breach of the agreement signed by Recope and CNPC, which expressly prohibited companies affiliated with the Chinese state oil company from carrying out the project's feasibility study. Moreover, the study itself was heavily criticised by the Comptroller's Office for overstating costs and inadequately detailing the projects market risks and financial projections for the upgraded refinery.
The decision has left the project - Costa Rica's largest investment - in flux. Recope has been told to rework the study and resubmit it to the government by January 2014.
Xi's last stop was in Mexico, where both China and the US are positioning themselves as the country considers energy-sector reforms that would open the oil and gas industry to more foreign investment.
During the visit, state-owned Pemex signed two deals with the Chinese delegation - a $1bn credit line with the Export-Import Bank of China to purchase ships and other equipment for offshore operations and an agreement with Chinese company Xinxing Cathay to collaborate on new pipeline projects.
The deals added to a growing list of agreements between the countries to cooperate on energy projects. In April this year, Mexican president Enrique Pena Nieto visited Beijing, where Pemex signed a deal to work with CNPC on bringing its enhanced oil recovery technology to Mexico's mature oilfields. State-run Sinopec, meanwhile, is in the running to win contracts to boost output at the Chicontepec oilfield, Mexico's largest.