How Chinese companies view energy investment opportunities in Mexico

Mexico has a long relationship with China, with diplomatic ties going back to the late 19th century.

The Asian giant is currently the ninth largest foreign investor in Mexico, according to the US House Committee on Foreign Affairs. In 2021, investment by China and Hong Kong-based companies totaled US$606mn, a 76% increase over the previous year.

In the energy sector, China is present in upstream through the China National Offshore Oil Corporation (CNOOC) and the China Petroleum Corporation (CNPC). Companies like State Power Investment Corporation (SPIC) also own significant generation assets in the country, and in late 2020 SPIC bought renewables developer Zuma Energía.

And in the LNG segment, Guangzhou Gas has shown interest in buying LNG exported from Mexico, and last year signed a 20-year, 2t/y deal with LNG Alliance, owner of the Pacific LNG project in Sonora state.

To understand the relationship, and what to expect from Chinese investors looking at Mexico in the coming years, BNamericas spoke to Margaret Myers, a fellow at the Woodrow Wilson International Center for Scholars.

Myers is director of the Asia and Latin America Program at the Inter-American Dialogue, has published extensively on China’s relations with the Latin America and Caribbean region, and holds faculty posts at Georgetown University, George Washington University, and the Johns Hopkins School of Advanced International Studies.

BNamericas: These have been trying years for many investors in Mexico's energy sector, with big changes in the country's policy direction. How have the views of Chinese investors in Mexico changed recently?

Myers: China's views and prospects in Mexico are ever-evolving, and largely based on the policy, political and economic environment of the country. The energy sector remains a prominent area of focus, especially in renewable energy, as China looks to invest in those industries that are going to upgrade its own economy. To the extent that the policy environment is welcoming and permissive, we'll see a lot more collaboration, regardless of what's happening between the US and Mexico.

Across the board, whether we're talking about Mexico or other countries in the region, or globally for that matter, China is constantly evaluating and re-evaluating the political and economic dynamic in whatever investment environments Chinese companies are involved in. 

One example of this was an interesting conversation held about three years ago between the Chinese ambassador to Mexico and the head of a private equity fund that is operating across the region and also in Mexico, and they were talking about prospects for investment in the country, and they suggested that, at this particular juncture, given a lot of uncertainty in the policy environment, whether we are talking about energy or otherwise, and a lack of understanding of what is the fourth transformation and how it will impact international investors on a sectorial basis, that the best course of action was to invest at the local level. 

So, rather than engaging with national projects, which is something China has done to some degree, there was a perception at that moment that it made more sense to engage with Mexican states or municipalities to try to strike a wider range of deals at a smaller scale in certain industries that have been prioritized in China. There's this constant reevaluation process.

As we see this constantly evolving situation in the energy space, at the company level there's also an evaluation of whether it makes sense to stay the course in Mexico, and there was discussion for, a period of time, within CNPC of potentially trying to sell their stakes in offshore. There were concerns also on the part of Ganfeng Lithium, which was involved in a joint venture with a Mexican company for lithium exploration and extraction, and that deal was orchestrated, but was shortly thereafter put under threat by a potential policy change. Now, it seems everything is proceeding, but there are still potential challenges there. All of these companies are operating in Mexico, and they see prospects for enhanced engagement, but it's not necessarily viewed as a stable situation. 

BNamericas: What are currently the areas in energy of most interest to Chinese firms abroad, and how do Mexican opportunities fit into the prospect-searching process?

Myers: A lot of Chinese electric power investment globally continues to be hydropower, and that doesn't apply very strongly to Mexico. Oil also plays a role in the China portfolio, focused on Venezuela, Ecuador, Brazil and also Mexico, especially offshore. There is a growing interest in renewable energy, and that certainly has been present in Mexico more recently. In oil, investments largely depend on China's own policies in view of its energy security, and how to achieve that. That's ever evolving. Within the energy ministry, within the Politburo Standing Committee, the select folk that govern China's investment strategy, there are disparate views about how much China should invest overseas in equity oil. There are shifts in the way China approaches this over time, as there have been for the past three decades. You see an intensive focus on equity oil at certain junctures, followed by periods where you don't see so much of that, and see more of a focus on other forms of achieving energy security at home. 

Coal is the means by which China expects to achieve internal energy stability in electricity, and it is investing a lot in coal projects, despite some of the statements Xi Jinping has made. I expect we will continue to see interest in the oil sector, but I don't imagine expansive growth, in part because Venezuela has not seen major growth in investment, because of the wide-ranging difficulties Chinese companies have encountered there. But China continues to stay the course with its current investments, and the same is true in Mexico, and in Ecuador, and in Brazil. I imagine things will stay more or less the same in this area, without major shifts. 

What we will see more of is a focus on renewables, in part because China has made a commitment to the energy transition and climate-related cooperation is a big part of its overseas agenda, and it's prominently featured in the redefined Belt and Road initiative. There's also something China announced called the Global Development Initiative, where climate and environmental cooperation factor very prominently. These industries, wind, solar, and the transmission-related work China is doing, such as ultra-high voltage lines that waste less electricity, are included in the way China defines its contributions to a cleaner grid. I think these industries are being prioritized and viewed as part of the subset of industries, which China calls "new infrastructure," that are critical to its own growth and upgrading, and they're going to be paramount in the coming years. 

As China faces much lower rates of growth overall, a shrinking population for the first time this year, and a whole wide range of other economic headwinds, these industries are seen as a success at home and a success abroad, and provide the ability to bring Chinese innovation overseas, which is going to be critical to China and its economic health in the coming years. What we see in the renewables sector is some debate, at the company level, on whether it makes sense to do equity investment, to do greenfield projects in solar or wind, or whether it makes sense to be simply a supplier. There have been plenty of examples of projects that have encountered real problems on the ground, delays, issues with partners in joint ventures, etc. At the firm level, there is this discussion. I would expect overall more movement in this space.

BNamericas: Recently, there has been lots of talk about nearshoring opportunities, bringing manufacturing and other industries from Asia into Mexico. The US government also seems to be making overtures to the Mexican government, and its relationship with China has soured somewhat in recent years. Do you think a closer relationship with the US in the coming years could affect the China-Mexico relationship?

Myers: Under the current administration, I don't think there's a sense that the US has more influence over Mexico. There have been efforts by both the US and China to exert more influence and strengthen bilateral ties with Mexico, understanding that there's no guarantee one way or the other of stronger ties or real progress in the bilateral relationship at the government level. There are prospects for enhanced engagement with both, and certainly there were indications not all that long ago, between China and Mexico, that the relationship would be strengthened even beyond a strategic partnership established already, and that there would be efforts to invest in a wider range of sectors and cooperation in new areas. All of these pronouncements were made within the past couple of years. 

At the same time, we see high level talks between US and Mexican officials in a wide range of issues, including in the energy space, especially hydrogen, and expanding upon the already robust supply chains. So, there are overtures made by both sides, and there's a sense that Mexico is not determined to align with one partner over the other. Hopefully that generates more opportunity for Mexico.

BNamericas: What is your sense of the Chinese investor's take on Central America? Is it perceived in a different light to Mexican companies?

Myers: I don't think it's perceived as easier by China. Central America is so complicated. You have countries that are diplomatically aligned with Taiwan, and then those that have cut ties with Taiwan and established diplomatic ties to China. Among the latter, which include Panama, Costa Rica, El Salvador, Nicaragua, there have been some discussion of opportunities in the energy sector, especially renewables, but not a lot has happened in this space. Much depends, as it does elsewhere in the world, on the cost-benefit analysis at a company level, and whether they see value. 

Some of the same impediments seen to energy investment by other companies are being identified by some Chinese companies as well. There could well be movement and opportunity, especially in Costa Rica and Panama, which are very invested in transitioning their energy infrastructure. China has also attempted to be involved in LNG projects in Panama, and those are halted right now, but may proceed. There were cost overruns and delays. Ultimately, the level of activity in Central America is far less pronounced than in the Caribbean and in other parts of Latin America.