ANALYSIS: China steps in to support refining in Americas


BEIJING -- Chinese companies are stepping in to support refinery projects in Latin America and the Caribbean due to an uncertain political situation and deteriorating financial conditions in Venezuela, which has been slow to deliver on earlier promises to develop refineries in the region.

State-owned China National Petroleum Corp., for example, is mulling an equity stake in the $13 billion Refineria del Pacifico project in Ecuador.

CNPC also has a $4.5 billion engineering contract to expand production at the Cienfuegos refinery in Cuba, while state-owned China CAMC Engineering Co. has a $233 million contract to help build a refinery in Nicaragua.

All three projects were originally conceived by Venezuela in 2007. The Ecuador and Cuba refineries are 49% owned by Venezuela's state-run Petroleos de Venezuela, while the Nicaragua refinery is backed by Venezuela through an investment company.

"The basic problem begins with a lack of investment capital from Venezuela to cover all of its promises made not only to Ecuador but to other places," said Jorge Pinon, a research fellow at the University of Texas at Austin.

"A lot of these announcements were political and without any sound commercial value behind them."

Venezuela has sought greater influence in the region by offering subsidized crude and promises to build refineries in neighboring countries. However, Venezuela has struggled to follow through since the 2008 financial crisis, which triggered a sharp decline in global oil prices and hurt oil revenue.

Chinese energy companies have been cautious about buying into downstream projects in Latin America and the Caribbean due to their lack of familiarity with local markets, fear of nationalization and concerns over the regulatory environment, said Yu Simin, a lawyer at King & Wood who specializes in outbound China energy and infrastructure investment.

Aside from CNPC's planned joint $1.2 billion refinery in Costa Rica, China's role has been mainly as a contractor rather than stakeholder.

All that could change, however, if countries like Cuba, which rely heavily on Venezuelan crude, decide to sell equity stakes in refining projects to the Chinese in order to deepen ties and ensure oil supplies.

"What we've seen recently is that when a Chinese state-owned construction company goes into a project, part of the payment is not only in cash but in equity interest," Mr. Yu said, citing some construction of overseas nuclear power plants as an example.

For the Chinese, downstream investments in the region make strategic sense because they provide additional outlets for crude produced from offshore oil projects in places like Brazil and Venezuela.

CNPC's listed unit PetroChina, for example, is already in talks to buy a refinery in Aruba from Valero Energy for $350 million. PetroChina is also studying the construction of refineries and logistics centers in the Caribbean and North and South America, PetroChina's chairman Jiang Jiemin said in May.

With Venezuelan President Hugo Chavez battling cancer and facing a tough election at home in October, neighboring countries like Cuba are looking to China to fill the political and economic vacuum that may be left behind.

All eyes will be on Cuban President Raul Castro's visit to Beijing, which wraps up this week, to see if any energy deals are announced.

"Cuba needs to try to manage what happens if there is a change in government in Caracas tomorrow, either by the death of Chavez or by Chavez losing the election," said Mr. Pinon.

"I personally believe that China would make an important long-term strategic partner for Cuba."

Dow Jones Newswires

The Author