Chinese bargains

 

Alaskans embracing the idea of Chinese investment in a massive, $44 billion project to transport natural gas from the North Slope to Cook Inlet and liquefy it for shipment to Asia might want to take a close look at what is happening to the south – far, far to the south.

The South American country of Ecuador hooked up with China to further resource development – most especially oil – almost a decade ago.

And now, the Los Angeles Times reports, the country is “straining under a huge budget deficit caused partly by obligations to the Chinese, whose loans financed roads, dams, schools and office buildings.”

The country is repaying most of those loans by turning its oil over to China.

It didn’t start out this way. The 2009 alignment of China and Ecuador was heralded as a win for both sides at the time.

“There is plenty of room to explore further mutually beneficial development between China and Ecuador,” the News of the Communist Party reported, citing Jia Qinglin, China’s top political adviser.

Then Ecuadorian President Rafael Correa Delgado said the move was a sensible strategic decision for his country.

“(Then) National Assembly Speaker (Fernando) Cordero echoed his president’s sentiments, saying China’s win-win approach to cooperation and its assistance was highly valued,” the Party News reported.

The Party News report came complete with those photos of smiling Chinese officials shaking hands with their smiling Ecuadorian colleagues. Everyone was visibly happy.

Why wouldn’t they be? Ecuador had untapped resources that required the sort of risky investment most lenders didn’t want to make. China had plenty of cash and a willingness to take risks.

Onward and upward

Three years after the cooperative agreement was struck, the Financial Post reported, “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.”

But a deal was eventually reached with Ecuador promising China it could claim up to 90 percent of the country’s oil in coming years.

Financial Post, a business publication, touted the deal as demonstration of “how the Asian giant’s oil firms are becoming powerhouse traders in energy markets far from home….

“(Ecuadorian) 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.”

Former Alaska Gov. Bill Walker, another man critical of the power held by Western oil majors, also turned to China. Walker was so critical of the oil majors he believed ExxonMobil was actually trying to keep Alaska natural gas off the market.

So the state took over an Alaska gas line project which the other major oil companies heavily invested in Alaska – BP and ConocoPhillips – had agreed to let Exxon head. BP and Conoco are not exactly friendly with the world’s largest, privately traded oil company, but they recognized Exxon’s established expertise in developing gas projects.

Walker thought he could do better than Exxon, but he needed capital. And so he turned to Asia.

“Our state will boom like no other time since the construction of the Trans Alaska Oil Pipeline,” the soon-to-be former governor proclaimed in an October oped sent to newspapers around the state as he prepared to vacate the Governor’s mansion in Juneau. “The opportunity is real. I know it because I have seen the pieces come together. I hosted China President Xi and his entire cabinet in Anchorage – they were so interested in our long-term gas supply that they came to us.

“And we got results…. In the presence of President Trump and President Xi, I signed a Joint Development Agreement with Sinopec, the world’s largest integrated oil and gas company; Bank of China, the world’s fourth largest bank; and, the China Investment Company (CIC), the world’s second largest sovereign wealth fund. We are in final negotiations with these companies to sign binding agreements.”

 

What could possibly go wrong?

Ecuador

China is a communist country, but it is also a global leader in what has come to be called “state capitalism.”

“State-directed capitalism is not a new idea,” as The Economist magazine pointed out in a 2012 special report. “But…it has undergone a dramatic revival. In the 1990s most state-owned companies were little more than government departments in emerging markets; the assumption was that, as the economy matured, the government would close or privatize them.

“Yet they show no signs of relinquishing the commanding heights, whether in major industries (the world’s 10 biggest oil-and-gas firms, measured by reserves, are all state-owned) or major markets (state-backed companies account for 80 percent of the value of China’s stock market and 62 percent of Russia’s). And they are on the offensive. Look at almost any new industry and a giant is emerging: China Mobile, for example, has 600 million customers.”

The business of these state-owned companies, at least when it comes to China, isn’t just business either.

“As Chinese state-owned and private companies align their global ambitions with those of the government, the strategy represents an export of China’s state-led economic system,” the Financial Times warned in July. “This presents a challenge to the affected industries as well as to the economies of industrialised countries, in which innovation is driven by profit expectations rather than by strategic national targets. In more drastic terms: it represents a threat to the core of liberal democratic economic systems.”

The London-based FT went so far as to suggest that maybe, just maybe, U.S. President Donald Trump’s trade war with China had some merit.

The “hawkish and unilateral approach employed by the U.S. might be questionable, but it has its merits in that it brings to light China’s problems with its major trading partners, including the European Union, which have long gone unaddressed,” FT’s Max J. Zenglein wrote.

Ecuador is finding just how severe those China problems can become.

“Ecuador is one of several Latin American countries that in recent years benefited from China’s lending spree,” wrote the LA Times’s Chris Kraul. “But terms of Ecuador’s $6.5 billion in Chinese debt have become onerous with the global decline in the price of oil, Ecuador’s main source of revenue from exports. Moreover, some developments financed by the loans, including hydroelectric plants, are not producing the revenue that was anticipated.”

How onerous?

Ecuador, Kraul wrote, “made deals to sell the Chinese millions of barrels of oil in advance on favorable terms, committing the country to ship 90 percent of all its exportable crude to the Asian giant through 2024. Terms of the deals, by which he mortgaged to China much of the country’s future production of crude, remain shrouded in mystery.”

Commitments to sell large percentages of exportable hydrocarbons? Negotiations shrouded in mystery? Does anything in Alaska sound familiar?

An Alaska-China joint development agreement “outlines the prospect of Sinopec signing up for up to 75 percent of the project’s liquefaction capacity with the Bank of China and China Investment Corp., the country’s sovereign wealth fund, providing a corresponding level of debt and equity financing to fund it,” Elwood Brehmer reported in the Alaska Journal of Commerce in July.

“As AGDC makes deal, details remain confidential” read the headline above the story.

AGDC is the acronym for the Alaska Gasline Development Corp., which is Alaska’s version of state capitalism.

Federal over-reach

Alaska is not, like Ecuador, an independent country no matter how some Alaskans might wish that. Alaska is a U.S. state and as such there are certain restrictions on what sorts of deals it can cut with foreign powers.

The Committee on Foreign Investment in the United States (CFIUS) has already warned AGDC about this, according to sources connected to the former governor.

CFIUS exists to protect the U.S. against exactly what happened in Ecuador and more. No matter how much Alaskans might complain about “federal overreach,” CFIUS is almost certain to get deeply involved in any Alaska gas line plan that locks in large shipments of the state’s natural gas to China if Alaska LNG ever moves past the talk and planning stage to something approaching a real possibility.

The U.S. has more than just economic interests at stake in dealing with China. The two countries are clearly in a global-power struggle.

Just this week, Bloomberg reported the arrest of the CFO of a Chinese tech company in Canada indicates a “deeper U.S.-China battle for global influence.

“…The arrest shows that the U.S.-China conflict goes far beyond trade. The world’s biggest economies are now engaged in a battle for global influence that will ultimately determine whether the U.S. remains the globe’s predominant superpower, or China rises as a viable counterweight,” wrote David Tweed and Enda Curran, although the U.S. insists the charges against Meng Wanzhou, the chief financial officer of Huawei Technologies Co., are linked solely to violations of U.S. sanctions against Iran.

Wanzhou is accused of lying about ties to a Hong Kong company that tried to circumvent trade sanctions, NBC News reported last week. She was arrested in the Vancouver, British Columbia, Canada airport at the request of U.S. officials as she was changing flights in that country.

A Canadian judge released Wanzhou after a three-day bail hearing, but she had to post a  $7.4 million bond and agree to wear an ankle bracelet, the BBC reported. The Canadians also said Wanzhou will be under 24-hour surveillance as she awaits an extradition hearing.

Though former Gov. Walker repeatedly expressed confidence an Alaska LNG deal with China could avoid entrapment in a U.S.-China trade war, it seems increasingly unlikely that a LNG project committed to selling large volumes of gas to China will be able to escape involvement.

“Team Trump scheming to escalate trade war with China,” the New York Post headlined above a Monday story that claimed the Justice Department is soon “expected to announce the indictments of multiple hackers who the feds suspect work for a Chinese intelligence service and are up to their necks in a massive espionage campaign that targeted American networks.”

“The tariff war is a bit of a sideshow to the broader geopolitical competition that is almost inevitably going to heat up,” Ely Ratner, executive vice president of the Center for a New American Security, a think tank, told Post reporter Bob Fredericks.

“There is essentially no overlap between Xi’s vision for China’s rise and what the US would consider an acceptable outcome for Asia.”

Given all of this, it would seem unlikely the U.S. would approve the sale of Alaska LNG to help fuel China’s rise. But then that might save Alaska from becoming another Ecuador.