Colin Chilcoat writes: As the world’s number one energy consumer China is enjoying the low prices while they last. Never one to settle however, China is finding still more ways to take advantage of the dire straits gripping several oil producers.
China’s slowdown is real but the country still has plenty of money to play with that is taking it places the World Bank and the International Monetary Fund (IMF) wouldn’t dare. Their reward? More oil of course. With tough conditions and greater access to raw commodities, China looks to turn the high risk into equal or greater returns.
Russia has turned to China for a bailout. China has obliged, agreeing to finance state-owned Rosneft’s debt in addition to opening a $24 billion currency swap program, which could expand further. For its part, China gets access to Russia’s tightly held upstream sector – in the form of the giant Vankor field – and fulfills its needs downstream with favorable long-term oil and gas deals.
Source: EIA
Russia’s economic situation is by no means rosy, but the state of affairs in Venezuela is downright awful. Oil and gas revenues account for one quarter of the country’s GDP and approximately 95 percent of its export revenues. Not surprisingly, low oil prices have the country teetering on the brink of default. Since 2007, Venezuela has borrowed more than $50 billion from China – loans that prevent Venezuela from otherwise marketing about half of its current exports to the Asian nation, which total approximately 500,000 barrels per day.
While perhaps more cautious, China is ready to keep giving. Venezuela and President Nicolas Maduro have received more than $20 billion in investment for economic, social, and oil-related projects. This arrangement precedes what Maduro hopes to be a more liquid $16 billion loan that could be more freely applied to its other debt obligations. Still, China sets the terms and it wants more oil in return – more than 100,000 bpd greater than current levels.
Elsewhere in South America, Ecuador has pinned its development hopes to the Chinese for better or worse. In Argentina, Brazil, Peru, China is also fronting the bill and staking claim to the raw goods. The country’s high-interest, inflexible lending draws parallels to the multibillion-dollar payday loan industry in the US. In this scenario, the lender is caught in a circle of debt with no real impetus for change. That circle may continue for some as China is pledging $250 billion in investment in the region over the next decade. The country’s oil-based financing is still an unproven gamble – and lower prices increase the default risk – but it’s shrewd move for what will soon be the world’s largest consumer of oil.
