How China Took Control Of An OPEC Country's Oil
November 26, 2013
China's aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador.
Last November, Marco Calvopiña, the general manager of Ecuador's state oil company PetroEcuador, was dispatched to China to help secure $2 billion in financing for his government. Negotiations, which included committing to sell millions of barrels of Ecuador's oil to Chinese state-run firms through 2020, dragged on for days. Calvopiña grew anxious and threatened to leave.
"If the Phase III transaction documents are not signed in the coming days, then I cannot remain in Beijing," he wrote in a confidential letter to China Development Bank (CDB), reviewed by Reuters.
In reality, Calvopiña had little choice but to wait. Shunned by most lenders since a $3.2 billion debt default in 2008, Ecuador now relies heavily on Chinese funds, which are expected to cover 61 percent of the government's $6.2 billion in financing needs this year. In return, China can claim as much as 90 percent of Ecuador's oil shipments in coming years, a rare feat in today's diversified oil market.
"This is a huge and dramatic shift," said Rene Ortiz, a former Ecuadorean energy minister and secretary general of the Organization of the Petroleum Exporting Countries. "Never before has Ecuador committed its oil to a lender."
A small OPEC exporter, Ecuador pumps around 520,000 barrels per day (bpd), or 5 percent as much oil as kingpin Saudi Arabia. But China's role in the Andean country shows how the Asian giant's oil firms are becoming powerhouse traders in energy markets far from home. The oil that Ecuador sells to Chinese firms can be traded anywhere. Yet less than 15,000 bpd is being shipped to China this year, down nearly 40 percent from 2012. Most is sent to the United States.
President Rafael Correa, a socialist who is critical of the power that Western oil majors and private energy trading firms once held in Ecuador, has touted the Chinese deals as a triumph of trade between close allies. Ortiz and other critics say the cash-strapped government's dependence on loans with increasingly onerous terms could hurt PetroEcuador's competitiveness, damage transparency in an oil industry that accounts for half of Ecuador's exports, and distance the country from other creditors.
Contracts, company presentations, and crude loading schedules show how China has come to dominate trading of Ecuador's 360,000 bpd of oil exports since its biggest listed oil company, PetroChina , first offered PetroEcuador $1 billion in financing in mid-2009.
By April of 2010, Chinese firms were receiving around a third of Ecuador's export oil. A year later the volumes had nearly doubled. By mid-2013, Chinese state-controlled firms were allocated 83 percent of Ecuador's oil exports.
When the latest loan deal was made public, in August, it brought the amount of financing that China has pledged to Ecuador during Correa's presidency to nearly $9 billion - equivalent to 11 percent of Ecuador's gross domestic product.
About 60 percent of these oil shipments are handled by PetroChina, the world's second-largest publicly traded oil firm after ExxonMobil and the listed arm of state-owned parent China National Petroleum Corp (CNPC). State-run Unipec - the trading unit for giant Sinopec Corp - and other Chinese firms get smaller volumes, the schedules show.
Beijing's growing thirst for natural resources has led Chinese oil firms to offer at least $100 billion in oil-related financing around the world. They already control growing volumes of oil from Venezuela, where China has negotiated at least $43 billion in loans; from Russia, where the tab may exceed $55 billion; and Brazil, with at least $10 billion. In Angola, the deals total around $13 billion.
In Ecuador, Chinese firms also participate in oil fields and a refinery project. But most of the loan transactions don't hand China direct control of oil wells, reservoirs or pipelines. Instead, the borrowings are repaid with cash proceeds from PetroEcuador's oil sales to Chinese firms.
The Chinese "provide financing for our country and, in exchange, we ensure sales of oil at international prices," Ecuador's then-Finance Minister, Patricio Rivera, told state-run TV earlier this year.
PetroChina International told Reuters its arrangements in Ecuador "are purely normal commercial contracts between two companies," and "have proved to be mutually beneficial."
PetroChina declined to discuss their terms. A PetroEcuador spokeswoman declined to comment; President Correa's office did not respond to questions from Reuters.
BEIJING BACKED TRADERS
China's cash advnces to Ecuador cover only a slice of the near $13 billion a year Ecuador can earn from oil sales. But since 2009 PetroEcuador has agreed to sell Chinese firms several hundred million barrels of oil, valued far higher than the loans themselves, according to a Reuters analysis of seven different contracts. With those supplies locked up, other buyers now get few chances to purchase crude from PetroEcuador in competitive tenders.
Today, Ecuador sets aside as little as 10 percent of its export oil to sell in such tenders to the highest bidder, Calvopiña told state TV earlier this year. In the past, tenders were far more common and frequented by U.S. oil majors or European trading firms. In one of just three such open tenders announced this year, Spain's Repsol bought 4.3 million barrels in September.
Chinese drillers have long competed with oil majors like Exxon. Since 2009, they have spent some $100 billion to buy oil and gas fields, in Latin America and elsewhere. Earlier this month, PetroChina and its parent company, CNPC, agreed to buy stakes in three Peruvian oil and gas fields for $2.6 billion.
But experts say the Chinese firms' strategy is evolving: By gaining control of crude flows from other national oil companies, China's oil giants are expanding into oil trading, where they compete with big commodity houses like Trafigura and Glencore.
"This is part of the increase in sophistication in Chinese companies," said Chen Ziwhu, a Yale finance professor and China specialist. With oil-backed loans, "Chinese companies are moving away from buying oil fields and wells."
The new oil flows allow China to hedge its exposure to oil prices or disruptions from suppliers closer to home, including top OPEC producers Saudi Arabia, Iran and Iraq.
Although China's oil imports are rising - they reached around 6.3 million bpd in September - several of its state oil firms now trade more oil abroad than they import to China, an official told Reuters last month.
Less than 2 percent of Ecuador's oil was shipped to China during the second quarter, according to Ecuadorean Central Bank data. Instead, at least 214,000 bpd of it wound up in the United States, where many refineries are configured to process heavy-sour Latin American crude.
Chinese firms serve as middleman in most of the Ecuadorean oil sales, while keeping a strategic option to divert barrels to China if needed. As China's trade grows in the region, U.S. relations have soured with Venezuela and Ecuador, whose leaders are outspoken U.S. critics.
"If China's control over South America's oil industry keeps growing, it could become a concern for U.S. policymakers," said Riordan Roett, political science professor at Johns Hopkins School of Advanced International Studies in Washington.
GROWING LEVERAGE
An analysis of hundreds of pages of Ecuadorean documents, including internal PetroEcuador memos, presentations and crude lifting schedules, offers new details on how China came to dominate Ecuador's oil flows.
Shortly after taking office in 2007, Correa, a U.S.-trained economist, declared a large chunk of Ecuador's foreign debt "illegitimate" and "odious," and the country defaulted the next year. With Ecuador considered a pariah in credit markets and the government scrambling to balance the budget, PetroChina offered a lifeline in July of 2009, depositing $1 billion in Ecuador's coffers. The "pre-finance" deal was to be repaid over 2 years and carried a 7.25 percent interest rate. Ecuador committed 96,000 barrels per day to Chinese firms.
Initially, PetroChina also agreed not to sell Ecuador's oil in nearby markets such as Peru or Chile, considered "PetroEcuador's natural market." For competitive reasons, many OPEC state oil companies retain tight control over the destination of their crude. In a July 2009 memo, Ecuador's Finance Ministry advised against giving China permission to resell Ecuador's crude wherever it pleased.
As the loans began flowing in, Chinese firms also seemed to be gaining favor in Ecuador.
In 2009, Correa was drawing praise from environmentalists with a plan to keep Ishpingo-Tambococha-Tuputini, or ITT - an oil-rich area of Ecuador's pristine Yasuni National Park - untouched by drilling. To do so, he publicly sought pledges of $3.6 billion from rich nations to fund the effort.
But the same year, Ecuador's economic policy ministry drew up a private presentation for Correa's staff, reviewed by Reuters, in which they pledged to "make the utmost effort to support PetroChina and Andes Petroleum," another Chinese-controlled driller, "in the exploration of the ITT" oil field.
Correa scrapped the Yasuni initiative this August, citing insufficient funding, and signaling that drilling could proceed in a small area of ITT. Petroamazonas, a state-run PetroEcuador affiliate, is expected to drill there, Correa says. Whether Ecuador will enlist a foreign partner remains unclear.
After 2009, terms changed in new Chinese loans, documents show. A 2010 deal for another $1 billion credit line from China Development Bank cut the premium that PetroChina would pay for Ecuador's oil, and granted PetroChina approval to resell the crude in any market.
In early 2011, Ecuador got another $1 billion loan, and authorized PetroChina to collect money from any other companies that owed PetroEcuador if Ecuador failed to meet repayment terms.
DEBTOR'S REMORSE?
PetroEcuador has sometimes been wary of the deals. In a March 2011 presentation, it cautioned that PetroChina's claim on Ecuador's oil flows might prevent it from selling to buyers willing to pay more. Market factors were converging to make Ecuadorean oil more "competitive," it said, suggesting fewer barrels be committed to PetroChina. The advice went unheeded.
PetroChina also has partnered with private trading firms - including one, Swiss-based Taurus Petroleum, whose trading in Iraqi oil had drawn scrutiny from U.S. prosecutors in the past - to resell some of Ecuador's oil.
For now, PetroEcuador's ability to seek other customers appears limited. An internal PetroEcuador memo prepared before the China Development Bank offered its latest loan carried a sobering reminder: "The proposed transaction will turn CDB into Ecuador's biggest financial creditor." Chinese loans would now be linked to "the majority of Ecuador's oil revenue over the medium and long-term."
