China builds Caribbean energy ties in upstream, LNG and refining
In recent years, the country has been boosting its presence in the region although its steps remain cautious
China is expected to play an increasingly prominent role in the Caribbean’s energy business after deals in recent years have given it a beachhead in the region’s upstream, refining and liquefied natural gas (LNG) sectors.
Beijing has sought to bolster ties with Trinidad and Tobago, the region’s major energy producer, in particular. When Trinidad and Tobago’s prime minister Kamla Persad-Bissessar visited China earlier this year, it was the first trip to the country from a Trinidadian head of state in more than 30 years. And energy relations were near the top of the agenda.
The US has historically been Trinidad’s largest market for LNG, by far its most important export. But as demand for LNG imports has declined in the US, Trinidad has looked to China, among others, to take the newly freed-up volumes. China is expected to ramp up its LNG imports over the coming years and it signalled its interest in Trinidadian gas in 2011 when China Investment Corporation bought a 10% stake in train 1 at Trinidad’s flagship Atlantic LNG facility for around $850 million.
Since then, LNG exports to China have increased, though overall the trade remains modest. The country’s, though, see the expansion of the Panama Canal, which will allow most of the world’s LNG fleet to pass through the waterway, as an opportunity to facilitate more gas trade between the countries. It is expected to cut more than two weeks off the journey between the Caribbean and East Asia, making the economics of the route much more attractive.
On top of its LNG investment, China’s state-owned oil companies Sinopec and China National Offshore Oil Corporation (Cnooc) have formed a joint venture for offshore exploration and production in the country. The companies have a 30% stake in the BHP Billiton-operated Block 2c, which produces around 45,000 barrels of oil equivalent a day (boe/d).
Sinopec also proposed building $5.3bn methanol plant in Trinidad and Tobago alongside Saudi Arabia’s Sabic, but the proposal fell apart early last year when the sides couldn’t come to terms over the plant’s gas supply. The Trinidad government is keen to attract new investment into its downstream gas sector, but critics say it lacks a clear strategy to do so, which might have contributed to the failed negotiations. Sinopec says it is still keen to invest on the right terms, but its not clear if the episode has discouraged Sinopec from further investment in the country.
Elsewhere in the Caribbean, China’s investments have been focused largely on the region’s struggling refining sector, often stepping in to replace Venezuela in projects PdV doesn’t have the cash to carry out.
State-owned China National Petroleum Corporation (CNPC) has a $4.5bn engineering contract to upgrade and expand Cuba’s Cienfuegos refinery, the country’s largest. It also has a $233m engineering contract for a proposed facility in Nicaragua and a $1.3bn deal to build a refinery in Costa Rica. Neither project, though, has got off the ground and the Costa Rican project has been heavily criticised domestically. CNPC was also reportedly interested in buying Valero’s 235,000 barrel a day (b/d) refinery in Aruba, which has been shuttered since late 2012.
The interest, analysts say, is part of a CNPC, publically-listed PetroChina’s parent company, strategy to build a global integrated business. CNPC-owned refineries in the Caribbean could absorb new production expected to come from upstream projects across Latin America, especially Venezuela and Brazil. At the same time, they would bolster the companies’ burgeoning oil trade business by strengthening its position in the Atlantic basin.
A confluence of factors, however, could cool CNPC interest in these projects. The company is under heavy pressure at home, where at least a dozen current and former company executives are under investigation for corruption. It is also being pushed to improve profitability. “Value over volume” has become the company’s motto in recent months. The company has pledged to cut its capital spending over the next few years. That marks a reversal from the company’s growth-at-any-cost recent past and could lessen its appetite for investment in economically challenged Caribbean refining projects.
China’s rising profile in the Caribbean has raised some eyebrows in the US. Some Cold Warriors see echoes of Soviet geopolitical manoeuvring by China in the Caribbean. “Today the Caribbean is regarded as a strategic and economic backwater by Washington. But the Soviets saw – and Beijing sees – something different: an American vulnerability,” Rush Doshi and David Walter, analysts at Long Term Strategy Group, a think tank, wrote in a Wall Street Journal op-ed. China, they argue, has studied the Soviet’s Caribbean strategy and have come to a similar conclusion: buying influence in the region projects power onto the US’ doorstep and serves as a strategic hedge in case of a crisis.
While there are hawks in Beijing that no doubt share this view, there is scant evidence it is driving China’s policy towards the region. For one, Chinese investment in the Caribbean remains modest. A study from the Inter-American Dialogue, a think tank, found that through 2011 the total stock of Chinese foreign direct investment in the Caribbean was just $500m. With projects in the pipeline this figure will certainly rise, but it remains a very small investment for the Chinese. Moreover, China’s engagement in the region has remained cautious and focused on building economic ties.