Strategic Risk in Latin American Energy Markets

If scholarship in China is any indicator, China’s NOCs are well informed about the strategic risks of operating in Latin America. There is evident concern with the destabilizing influence of domestic politics in the Andes region. Scholars have noted how environmental, labor, and indigenous movements, as well as armed militants, have disrupted oil projects (Hou Ruining and Peng Qing 2009, Pan Xiping et al. 2011).

They also show little sympathy for the destabilizing actions of leftist governments – Zhong Shi (2005) criticizes the Chavez coup of 2002, which led to the failure of a $2 billion LNG project with Shell and Mitsubishi. Beyond the Andean region, there is a general wariness of the legal and institutional barriers to foreign investment. Policy analysts note how monopoly practices and FDI restrictions have left production potential untapped while excessive tax burdens and administrative inefficiency hurt businesses (Su Wen and Yu Zhengwei 2010, Wang Yue 2009, Zhong Shi 2005), as described by the Inter-American Dialogue’s literature review on China-Latin America energy engagement.

In response to the perceived risks of the Latin American markets, Chinese analysts have issued a series of policy recommendations to China’s NOCs:

1. Shift to more stable markets. China’s focus should gradually move from the Andes region to more mature and stable markets. There is potential for more Sino-Brazilian collaboration, given Brazil’s newfound reserves and the two EBLs already in place. (Wang Yue 2009).
2. Mature existing projects. After a period of aggressive expansion – owing in particular to the pre-salt oil discovery in Brazil and the global financial crisis – the task for China’s NOCs now is to develop existing projects and partnerships rather than forging new ones (Sun Hongbo 2011).
3. Improve capabilities of China’s firms and institutions. To develop existing projects, the NOCs need to bring in more than capital – they also need more capable personnel who can operate projects. That means gaining familiarity with local market dynamics, unstable legislative frameworks, and labor and indigenous movements (Sun Hongbo 2011).
4. Improve communication among Chinese stakeholders. China’s NOCs should exchange information with one another and with the Chinese government in order to anticipate destabilizing changes in the host country (Sun Hongbo 2011).
5. Build multiparty diplomatic efforts. China’s NOCs should engage with a broad range of stakeholders, including civil society, oil firms, and political parties not in power, in order to hedge against political contingencies. China’s NOCs should learn from Syria, where Sinopec’s efforts to improve relations with the Resource Ministry eventually paid off (Sun Hongbo 2011).”

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The article “Legal Suggestions for Chinese Investors in Business Disputes in Africa and Latin America” (中国企业投资非洲及拉美之争议解决的法律和实践) was written in the aftermath of Chavez’s death to address political risks in Venezuela and offers suggestions for Chinese firms and lending institutions operating in Venezuela and other Latin American countries.

Article Highlights

Incomplete legal systems in Latin America combined with political polarization (leftist tendencies) can introduce risk for Chinese investors. Forms of risk include:

• Nationalization
• Breach of contract
• Changes in legal terms and conditions
• Protectionism

Keeping in mind these risks, Chinese Investors in Latin America are given seven recommendations:

• Invest in countries that have signed international investment protection agreements with China. China has signed bilateral investment agreements with 16 African countries and 11 Latin American countries.
• Indirectly invest in countries that have not yet signed bilateral agreements with China.
• Add “stabilization clauses” to investment contracts, with sub-clauses referencing property rights, taxation, foreign exchange regulation, export-import regulation, legal framework, etc. (Example: nationalization policy under Chavez forced many corporations to move out of Venezuela. Chinese investors should exercise caution when investing in Venezuela and elsewhere in the region.)
• When necessary, add arbitration clauses in investment contracts.
• Choose recommended arbitration venues: Singapore or London.
• Involve lawyers with expertise on host country labor and environmental law.
• Be aware of corruption risks.