China wants mexico’s oil, but at what price?

China - Mexico - Francisco Neri Bonilla

When Enrique Peña Nieto was sworn in 2012, he knew he wanted to make Mexico a giant magnet for foreign investments. That meant smiling at China, after more than a decade competing fiercely for the US market. It was time to invite China to participate in sectors that whet the dragon’s appetite: raw materials – especially oil- and important public works.

Less than two years after its inauguration in the summer of 2014, the new Mexican government claimed publicly that the Asian giant would invest $590 billion on its infrastructures until 2018. In November, the company China Railway Construction already achieved, together with a group of local companies, a huge contract to build high-speed railways of 200 kilometers in length connecting Mexico City with the state of Querétaro at a cost of $4.3 billionThere were no rivalsin the public tender, as they only allowed the attendance of the consortium owner of the Chinese multinational which is, of course, a state-owned company.

Few weeks later, the award had to be cancelled due to evident suspicions of corruption. Nobody mentioned such embarrassing situation when Peña Nieto and his Chinese counterpart Xi Jinping announced the business movementsthat would light up the new relationships during a Peña Nieto’s visit to Beijing. “I want to stress that the basis of our relationship is trust,” then claimed the Mexican president.

But, what were the lyrics of that Latin hit about mutual trust and respect that sounded so good? To begin with, Pemex would receive a $10 billion credit from the Chinese bank ICBC; a bilateral fund of $2.4 billion would be created for investments on mining, energy and infrastructure in Latin America; and strategic agreements were signed between Pemex, the Chinese oil company CNOOC and China Development Bank, the entity usually financing large transactions of Chinese public companies regarding raw materials. In addition, the Mexican president stated that they expected to make three Chinese corporations invest $5 billion on Pemex’s projects, including the colossal gas pipeline Los Ramones, which would connect the Texan city of Agua Dulce, and the Mexican city of Guanajuato through gas pipelines of 1,200 kilometers long.

Mutual interest 

Since then, the convergence of interests between both countries has been strengthened thanks to multiple factors. On the one hand, Beijing, a power really fearing a trade embargo, is always hunting and capturing new energy partners to help it diversify supply, as seen in the Mexican case, but also the Russian case. On the other hand, the severe political instabilityin Venezuela is not good for businesses and Caracas is China’s eighth crude provider. Mexican reserves, which oil has similar characteristics, although much less abundant, could help partially compensate a supply interruption in case Nicolás Maduro’s administration would start teetering.

Another element helping relationships between Mexico and China is the apparent change in the attitude of the United States in the last two years. Although in early 2013 they forced CNOOC to sell assets acquired in the US part of the Gulf of Mexico after purchasing Canada’s Nexen, now they could accept without major difficulties the Chinese to exploit Mexican wells near their waters. According to Lisa Viscidi, Director of the Energy, Climate Change & Extractive Industries department at Inter-American Dialogue, Washington, her country “would not consider it a threat to security, they would even consider it good news.”

What changed? 

The first thing, evidently, is that production would be then located in Mexican waters, but it is also important to remember that the first world economy is much more independent from external energy since it is extracting, for some years now, large amounts of unconventional gas and oil from its own subsoil. Viscidi provides us with another key: “No foreign investor can purchase Mexican reservoirs and blocks… They will always be state-owned although companies can exploit them temporarily.”

CNOOC was actually going to own wells in US territory and that was, at least by that time, unacceptable. In any case, we are not only talking about the company acquiring Nexen and making the White House and the Pentagon nervous, but also about the company apparently selected by Beijing as its representative in the Aztec country. Rebecca Ray, researcher of the Boston University’s Global Economic Governance Initiative, believes that this multinational, despite being public, “is significantly independent from the Chinese government” although it is still subject to its strategic guidelines.

Precisely, this undeniable link with the communist government may result in two advantages for Mexico, according to Ray. The first one is that the company’s management can result in the Chinese state’s good or bad reputation, as it is “one of the diplomatic relationships’ public faces” between both countries. This would grant the civil society and Peña Nieto’s administration the possibility of pressing it to perfectly meet “social and environmental standards.” The second advantage is that, being CNOOC a state-owned company, “Mexico will be able to address any problem, not only through governmental agencies but also through diplomatic channels of both countries.”


How hungry is the dragon? 

Steven Lewis, C.V. Starr researcher on China for the Baker Institute of Rice University in Houston, recognizes that companies from the Asian giant “can do everything their government wants,” which is something that could immediately become a two-edged sword. According to Lewis, it will be more difficult to set limits and detect acts of corruption as CNOOC is not, for example, a Western company, because “courts” in Europe or in the United States investigate corrupt practices, parliaments study the management of public companies, and there are anti-corruption activist organizations tracking suspicious transactions. The separation of powers, transparency and influence of different levels of the civil society are conspicuously absent in China.

The likelihood of new corruption scandals causing reactions in the streets -undermining Peña Nieto’s efforts- is only one of the reasons that make Steven Lewis doubt about a spectacular China’s landing on Mexico. He also believes that logistics costs will influence, as China can be obsessed with the diversification of suppliers in order to avoid an embargo, but it also cares about the price to be paid for “crossing the Pacific” with relatively small vessels (they must be adjusted to the Panama Canal’s tightness) and, therefore, with a smaller load. In addition, Lewis believes that choosing this option makes no sense, as wells of the South China Sea can be exploited first. This is a maritime area covering 3,500 square kilometers for which China is in dispute with Brunei, Taiwan, Malaysia, Philippines and Vietnam.

The expert from Rice University also doubts about the interest of western multinationals when it comes to working with CNOOC in Mexico. He recalls that they are not happy about the way the Chinese copy their technology, throwing them out once they have extracted all the knowledge they needed. He also fails to see a reason to help CNOOC to extract crude oil offshore, which is precisely the main interest of Beijing, as they could apply what they learnt in the South China Sea, even if the oil barrel reaches $90. Lisa Viscidi is convinced that “oil companies [from the Asian giant] are going to exploit blocks with other partners.” In these cases, she says their business is “minority interests” like the CNOOC-BP partnership in Argentina.

For the time being, the big question is not whether China is interested in Mexican oil, as agreements between Peña Nieto and Xi Jinping announced in November 2014 show that it is a fact. The big question is how much it is interested within a context of falling oil prices, Saudi Arabia wishing to keep them low in the medium term despite monetary costs, production significantly increasing in Iraq, and Iran -a Beijing’s natural ally- coming back as a big oil producer.

If it wants to seduce the Asian giant, Mexico will have to offer the best conditions. But, what will they be and, to what extent the population will accept them? Will Mexico be willing to open the gates – as far as free trade agreements with the US and Canada allow it- to a storm of Chinese manufacture that, as occurred in Venezuela, compete directly with local producers? Will it give priority to Beijing or Shanghai’s construction giants in big public works after the Mexico City-Querétaro high-speed railways awards scandal? Will it take the risk of allowing CNOOC to use the Gulf of Mexico as testing ground for the South China Sea only five years after the Deepwater Horizon’s massive fuel spill into the same waters? And… Maybe the most worrying question: Does Enrique Peña Nieto have any alternative?
Post by: Francisco Neri Bonilla

Author: Francisco Neri Bonilla

Francisco Neri is an entrepreneur and a proven specialist in operations. With extensive background launching and managing different kinds of businesses he has more than 15 years of experience in delivering integrated marketing, logistics and digital solutions to multinational clients and companies. Francisco has extensive operating experience in different industries including corporate advertising and corporate communications, marketing solutions, specialized publications and high-profile events design and production. Francisco graduated as B.A. in law at UCAB.

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