China turns the taps off
Economic growth may be rebounding, but demand for Latin American crude remains minimal
Latin American oil producers have been bracing themselves for especially hard times ever since China shut down its economy due to Covid-19. The Asian giant is the world’s largest crude oil importer and a critical market for Latin America’s state oil firms, accounting for about 40pc of the region’s crude exports in 2018.
The 41pc contraction to China’s first-quarter GDP, combined with the global oil price rout, is something of a worst-case scenario for the region’s producers. But China’s crude imports resumed relatively quickly in March as the country strategically boosted stockpiles amid signs of economic recovery. Volumes were up by 4.5pc year-on-year over the month even as the volume of oil products produced by refiners fell by nearly 7pc, according to US bank JP Morgan.
But the Covid-19 containment efforts are still having an impact and will likely affect China’s crude oil imports, refinery runs and domestic consumption through the second quarter of 2020, notes the US Energy Information Administration(EIA). Venezuela and Brazil, the which depend most heavily both on Chinese oil demand and direct investment, will be among the hardest hit by the economic downturn in the Asian country.
In Venezuela, where China had already pulled back on trade and investment in response to US sanctions, energy ties may be at risk of further unwinding. The country’s heavy oil fields are unprofitable at current prices, storage space is running out, and Russian companies that were trading oil on Venezuela’s behalf are now also navigating US sanctions. Venezuela’s output fell to 660,000bl/d in March, down from 760,000bl/d in February. Production and exports are likely to drop even further in April.
Although China’s oil-for-loan agreements with Venezuela encourage the delivery of at least some of the country’s crude to Chinese importers, these agreements—which are based on the current price of oil—are practically impossible to honour on the supply side when oil markets collapse. Nor, in the demand equation. are shipments of Venezuelan crude particularly attractive relative to the hassle of US sanctions’ risk. On the investment side, China has also pulled back due to sanctions’ concerns. Its main oil projects in Venezuela—Sinovensa, Junín 4, Intercampo and Zumano—are either producing minimal quantities of oil or completely shut in.
As the second-largest non-Opec supplier to China, Brazil also depends heavily on Chinese crude demand. Brazil shipped 63pc of its crude to China in 2019. The proportion is even higher for state energy giant Petrobras, which sends about 85pc its oil exports to China each year.
For Petrobras, much will depend on the health of China’s so-called ‘teapot’ refinery sector, which accounts for about a fifth of the country’s crude import demand. The firm has sought to expand its customer base in China in recent years by selling small volumes to these independent refineries. The collapse in oil prices could improve margins for these smaller, private facilities, but most will still struggle amid weak domestic demand for products.
Venezuela and Brazil will be among the hardest hit by the economic downturn
China is also an important player in Brazil’s upstream sector, holding minority stakes in various offshore fields. But, even setting aide potentially reduced Chinese investment appetite, new opportunities in Brazilian E&P will be more limited in the coming year. In April, Brazil’s oil regulator suspended the country’s 17th auction, which would have offered 128 offshore blocks.
Without prospects for an auction, in-vestors will be able to increase exposure to Brazil only through farm-ins. This could be relevant, as Chinese firms have generally preferred to acquire mature producing assets in Latin America rather than take on exploration risk. But, with China’s economy facing continued hurdles and the massive global oil supply glut, it seems unlikely Chinese oil companies will be straining to expand their Brazilian footprintthis year.
Even a V-shaped recovery in China is unlikely to considerably improve the prospects for Latin America’s main oil producers, with suppliers all over the world competing to retain market share. Despite rock-bottom prices throughout the region, and potential strategic interest, it is doubtful Chinese investors will have the capital to flock to Latin America in the immediate aftermath of Covid-19.
Margaret Myers is director of the Asia and Latin America programme at US thinktank the Inter-American Dialogue. Lisa Viscidi is director of the organisation’s energy, climate change and extractive industries programme.