Photo: CharlieChesvick/Getty Images.
At a critical moment in time when international organizations such as the United Nations COP27, The World Bank Group, The Paris Club, and others are calling for greater green financing, many Latin American countries are simultaneously investing heavily in not only mineral mining and renewable energy sources but also in crude oil production. This, at first glance, appears to run contrary to the UN’s Sustainable Development Goals (SDGs), which include calling for decarbonization and a more impactful green footprint via public-private capital investments in green technologies and infrastructure. However, many developing countries in the Global South cannot afford the luxury of decarbonizing at the same pace as their developed peers. Thus, some notably developed states, such as Brazil, and other more low-income countries, such as Guyana and Suriname, have been positioning themselves to receive investments in both the extraction of crude oil and the green infrastructure required to reach carbon-neutral goals.
Fueling Development, One Barrel at a Time
Two monumental oil projects in Latin America stand out. The first is the Bacalhau Field off the coast of Brazil in the Santos Basin, and the second is the Guyana-Suriname Basin. While Brazil has accepted investments from China via comprehensive strategic partnerships to mine for critical minerals, both the government and the oil industry are keen to capitalize on relatively newfound discoveries of crude oil in their backyard. Guyana and Suriname, on the other hand, are less fortunate in receiving foreign direct investments in green energy production and mineral extraction at the same levels as its neighbors. They thus have found an opportune partner in an Exxon Mobil-led consortium to potentially extract 11 billion barrels-worth of oil at a break-even point of only $35 per barrel of oil.
Positioned to also share in the unique opportunity is China National Offshore Oil Corporation, which owns a 25 percent share in the project (Exxon Mobile commanding a 45 percent share). Guyana is viewed as one of Latin America’s cheapest places to invest in and could see oil production reach 1.2 million [PR1] barrels per day by 2027. By 2035, investment in Guyana’s oil production may allow it to source as many as 1.7 million barrels per day, a move that would position the South American Country ahead of the U.S. and other traditional oil producers, making it the fourth largest oil producer globally. Brazil can also join in the spoils with a partnership including China Petrochemical and Exxon Mobil (among others) producing 220,000 barrels of oil per day via one floating production storage and offloading (FPSO) platform. In addition, the new Japanese-built FSPO can extract oil with 65 percent lower greenhouse gas emissions than Exxon Mobil’s industry average.
Sino Influence in America’s Backyard
The backdrop to this paradoxical puzzle is Chinese influence in the greater Latin American region more generally. Much to the dismay of the United States and the European Union (EU), Brazil, Chile, Cuba, Peru, and Uruguay have shifted their exports away from the EU and towards China (in the context of 2001-2021). This profound shift has resulted in China signing free trade agreements (FTAs) with Chile, Costa Rica, Ecuador, and Peru with several other FTAs said to be nearing completion for Uruguay, Panama, and Colombia. The kicker for the United States and the EU is that these FTAs are said to be in compliance with the UN’s 2030 SDGs.
While these relatively new FTAs and a “South-South Cooperation” approach may allow China to tout its development model as financially more attractive than the West’s, as well as compliant with global climate goals, some Latin American countries are struggling with debt distress. Guyana, for example, took out a substantial loan from the Bank of China for $172 million in order to help pay off a different $260 million loan owed to China Railway Construction Corporation, which went towards modernizing transportation infrastructure. Suriname is also in deep water, having the highest level of debt-to-GDP ratio of any Latin American country at 18 percent as of March 2022. Brazil has been a bit more fortunate when dealing with China. It has received a $565 million investment from the Chinese electric automaker BYD to build three factories for a battery plant and two automotive chassis plants. It should be noted, however, that Brazil’s EV market is considerably smaller in size than those of either the United States or the EU. Yet this should not deter green investments in the Brazilian automotive industry but rather indicate that investors should contemplate the level of risk associated with an emerging EV market that is in its infancy.
Charging On Ahead, One Initiative at a Time
Electric vehicles (EVs) are one of a plethora of commodities that are being revamped to fall in line with renewable energy aspirations and lower carbon emission standards. The Congressional Research Service noted in a 2022 report that the United States’ EV market is small relative to the EU and Chinese markets; however, President Joe Biden has enacted the Defense Production Act of 1950 to boost domestic mineral production and refining, which should help boost EV battery production. EV lithium-ion batteries are made up of five critical minerals including lithium, cobalt, manganese, nickel, and graphite. While the United States produces 87 percent of the battery packs for EVs sold domestically, they are still over-reliant on China for the refining of rare earth minerals. Thus, the reopening of Mountain Pass in California, which is operated by MP Materials, is a significant sign of progress for United States national security. Other prospective mines need to be streamlined in order to meet the global mineral needs, but red tape and environmental concerns cause gridlock. In order to fast-track mines, The Infrastructure Investment and Jobs Act is meant to “improve the quality and timeliness of Federal permitting and review processes with respect to critical mineral production on Federal land.” Federal grants, loans, and private investments in R&D can lead to better mining techniques, more efficient recycling methods, and greater know-how regarding prolonging the life cycles of EV batteries.
The United States has also responded with the Partnership for Global Infrastructure and Investment (PGII) (formerly the Build Back Better Initiative) and the Blue Dot Network (BDN), among other regional-specific initiatives. The objective of the BDN is to create a transparent network in which developing countries can obtain certification based on sustainable standards, while the PGII aims to mobilizes billions of dollars towards the infrastructure, financial, health, and social development sectors. Members of Congress have also proposed the IDB Transparency Act, which is a bipartisan bill introduced by Senators Bill Hagerty (R-TN) and Bob Menendez (D-NJ), among others, in 2023. This bill states that China has used its influence in the Inter-American Development Bank (IDB) to be “ranked among the top countries awarded contracts by the IDB, ranking number one in 2019,” despite the United States contributing roughly $54.2 billion and having a 30 percent voting stake, while China contributed $129.1 million and has only a mere 0.004 percent share. This puzzling fact is also exemplified in that China has dominated Latin American trade for the past three decades, rising from $1.7 billion in trade to $428 billion. The proposed Act stipulates that the United States would be required to “vote against PRC-funded projects or projects involving PRC companies that threaten U.S. national interests; and block new share sales to the PRC.”
In Latin America, four states are considered low middle income countries, while the rest are categorized as middle upper income or high-income countries. These designations carry significance when the United States International Development Finance Corporation (DFC) is contemplating which of those countries are eligible for aid in the energy sector, specifically. The United States Agency for International Development (USAID) has also been an impactful partner by contributing $4.9 billion in development assistance and $3.7 billion to the economic support fund in fiscal year 2021 to Latin American and Caribbean countries. However, there is still a sizable shortfall in investments made and those required. For instance, only Brazil, through the company TechMet was given a loan from DFC targeted at the energy sector in 2022, with $30 million for “critical minerals mining platform for green energy transition.” Therefore, more financing is required from USAID and DFC to bolster the United States’ influence in the region for energy investments when competing with Chinese state-run policy banks and development banks.
Development Banking in Latin America
In the context of international development in Latin America, the IDB has an outsized share of influence in funding much needed projects in the region. With a substantial pot of $176.8 billion from which to draw from, $12.7 billion was bankrolled in 2022 for 96 sovereign guaranteed loan operations, with $5.9 billion prescribed for climate change-related activities.[PR6] The IDB is also ranked third out of fifty development and aid disbursing institutions by Publish What You Know in 2022 regarding the Aid Transparency Index. Within the IDB’s SDGs in 2023, it noted that under its five-layered project cycle “[its] environment and social specialists classify all projects according to potential environmental and social impacts and rate them for environmental and social risk,” a key discrepancy that was lacking from The Export-Import Bank of China and the China Development Bank, until recently.
While the IDB focuses on all aspects of development, Chinese state-owned enterprises have been targeting the mining industry more intensely, with $16 billion going to South America from 2018-2020. The United States has brought together Australia, Canada, Finland, France, Japan, the Republic of Korea, Norway, Sweden, United Kingdom, and the EU under the Minerals Security Partnership (MSP), alongside Argentina, Brazil and six other mineral-rich countries as participating partners to counter China’s power plays. The MSP “aims to ensure that critical minerals are produced, processed, and recycled in a manner that supports countries in realizing the full economic development potential of their mineral resources. The MSP will attract public and private investment, increase transparency, and promote Environmental, Social, and Governance standards throughout critical minerals supply chains.” This partnership is meant to counteract what the UN Committee on Economic, Social, and Cultural Rights has reported as China being involved in “environmental hazard or human rights violation[(s)]” in fourteen cases in nine Latin American countries (Brazil amongst them).
Are these Relationships Sustainable?
While the West attempts to convince the rest of the developing world to ‘go green,’ Latin American countries are obviously heeding a different message. Here, Chinese (as well as American) investments and influence in MDBs and regional FTAs are signaling that oil production, as well as mineral and renewable energy sources, are all in great demand. The United States and its European partners need to strongly prioritize that while it is in the developing country’s best interest to mitigate against climate change via adopting green technologies and best practices, national security and economic indicators are signaling that channeling Western influence into these hydrocarbon projects would align with United States and EU national security priorities. Brazil, Suriname, and Guyana should pursue their oil endeavors (made with American and Chinese investments) and, at the same time, continue to welcome IDB, World Bank, and other MDB loans from both Western and Chinese investors who are keen to further climate-friendly objectives.