China in Angola: An Emerging Energy Partnership

Despite the impressive economic ties between China and Angola in recent years, their historical relations have suffered periods of strain and volatility. During Angola’s struggle against Portuguese colonial rule, China provided training and assistance to UNITA, one of the three rival national liberation movements in Angola, while the Soviets supported the MPLA and the United States initially backed the FNLA. When independence was achieved in November 1975, the MPLA controlled the capital, and its leader, Agnostinho Neto, became the first president of Angola. Although China subsequently severed its ties to UNITA, the two countries did not establish diplomatic relations until 1983, a reflection, perhaps, of the previously strained relationship between the two governments. During the next two decades, China maintained a fairly low profile in Angola, providing only small-scale assistance. There were reports that Beijing had helped establish a fishing cooperative, an electric appliance factory and a low-cost housing project. In light of what was to come, however, the Chinese role during these two decades was modest.

The Turnaround

Relations between the two countries took an about face in March 2004 when China’s Export-Import Bank (Eximbank) offered a US$2 billion oil-backed loan to Angola on very favorable terms (Financial Times, March 4). The reasons for an offer of this magnitude soon became clear. Shell had divested itself of its oil interests in Angola and had negotiated a deal with Indian oil companies to take over its 50% equity-stake in deep-water Bloc 18, operated by BP. Sonangol, Angola’s national oil company, exercised its right of first refusal and instead, gave the equity stake to Sinopec, one of China’s national oil companies (The Financial Express, March 8, 2005). In another development reflecting China’s increased clout, Sonangol refused to extend France-based Total’s concession over one part of offshore oil Bloc 3, presumably because of an Angolan pique with the French government over the “Angolagate” affair; Sinopec was the end beneficiary of the new arrangement.

In the most recent round of bidding this year, the Sonangol-Sinopec consortium (SSI) made record breaking bids amounting to $2.2 billion in signature bonuses to obtain rights in relinquished areas of deep-water Blocs 17 and 18 (BusinessWeek, June 7). The Chinese were not the only ones bidding high. In an earlier round in April, ENI, the Italian oil company, bid over $900,000 to win operating rights for the relinquished areas of Bloc 15. SSI received a 20% share in that bloc. Although SSI has the major equity stake in the relinquished areas of Bloc 18 (40%), Petrobras, the Brazilian oil company, will be the operator because the Chinese lack the capability to develop deep-water areas (Latin American News, November 6).

China’s motivations to strategically target Angola for investment are multifaceted, ranging from the level of political stability to its natural resources. Angola enjoys a large measure of political stability, especially since the death of Jonas Savimbi, UNITA’s leader, in February 2002. Furthermore, in April of that year, new peace accords were signed between the government and UNITA; most observers believe that in contrast to previous agreements, the peace will last this time around. Even during the years of war, the major oil companies had established good working relations with Sonangol and were able to carry out operations off the coast of Angola without interruption. A further consideration for China was that Angola’s oil production has surged in recent years and is expected to reach 2 million bpd in 2007. The deep-water blocs have been especially prolific, and even though the oil majors (BP, ExxonMobil and Total) have presumably explored and developed the best parts of Blocs 15, 17, and 18, there is the promise of additional oil to be found in the relinquished areas.

In addition to acquiring equity-stakes in oil concessions, the Chinese have also invested in the development of Angola’s oil processing infrastructure. Sinopec and Sonangol have formed a consortium to build a major new refinery in Lobito. Sonangol and the Ministry of Petroleum had previously attempted to attract the oil majors to invest in the project but were unsuccessful because of concerns about the project’s financial viability. Emblematic of the burgeoning relationship between the two countries, Angola surpassed the Saudis and became the number one oil exporter to China in February 2006 (Financial Times, October 26).

Beyond the Oil Sector

Under the ambit of the $2 billion loan, Chinese companies are engaged in a host of projects throughout Angola, constructing schools, clinics, hospitals and low-cost housing and building basic infrastructure, such as roads and bridges. The most ambitious undertaking is the rehabilitation of the Benguela railroad, linking the port of Lobito on the Atlantic with the DRC and Zambia, the old copper route. Other major projects include a new airport and a railroad linking Luanda with Malange, a major town in the interior of the country. The Chinese telecommunications company, ZTE, is modernizing and expanding Angola Telecom’s fixed line telephone network, as well as investing in military communications and establishing a telecommunications training facility. Another Chinese company is working on the production center for Angola’s television station (Afrol News, March 7, 2005).

Indicative of the growing Chinese business presence, 26 Chinese companies established a Chamber of Commerce in Luanda earlier this year. At this point, the bulk of Chinese projects are of the “brick and mortar type” and are focused on infrastructure rehabilitation, which correspond to the Angolan government’s strategy of giving top priority to reopening the country’s transportation corridors devastated by the 27 years of war. Investments or assistance to promote long-term sustainable development and capacity building are thus far minimal, though there have been reports of Chinese involvement in funding a $40 million cotton growing project (Angola Press Agency, November 6).

Lack of Transparency in Activities

In spite of the magnitude of China’s projects in the country, very little is known about them. For instance, it is unclear exactly how much money in the form of aid and loans has been offered by Beijing; estimates vary from $2 billion to $9 billion. The Angolan government maintains that the level is currently $2 billion, which most likely reflects the fact that the original Eximbank loan of $2 billion has not yet been used up, but that further monies will be become available once it is. It is also unclear exactly how many Chinese nationals are currently residing in Angola, with reports citing anywhere between 10,000 to 80,000. While Angolan officials have dismissed the upper end of the estimates, they themselves do not offer an official count.

The bidding process for the lucrative contracts is likewise opaque, as it is unclear how many Angolan companies have received contracts under the Chinese loan, though according to the terms of the Eximbank agreement, 30% are supposed to go to the Angolans. Nor is it known how many Angolans are employed by the Chinese, though once again this is stipulated in the agreement. Whatever the facts may be, the popular perception is that the Chinese have gotten the lion’s share of the loan money and have brought large numbers of Chinese workers to carry out their projects.

Challenges and Opportunities Ahead

Unlike Sudan or Zimbabwe, Angola’s growing partnership with China should not be viewed as a serious threat to the interests of the West or the United States. Although China’s propensity to lock into oil supplies runs counter to the West’s preference for it to rely on market supply and demand mechanisms, it is at a high cost to the Chinese and does not seriously degrade U.S. energy security. Of more immediate concern is the competitive advantage that Chinese oil companies enjoy because of credit lines and other incentives offered by the Chinese government and its agencies. Angola is not yet an exclusive Chinese market, however, and Angola does not look at China as its sole or even most important partner. Angolans want high quality goods and services from the West and the United States and welcome western investments in the non-oil sectors. The recent purchase of Boeing aircraft, amounting to almost $1 billion, by TAAG, Angola’s national airline, underlines this point. Five of the aircraft are scheduled to arrive in Luanda on November 11, Angola’s Independence Day. Similarly, GE may be supplying locomotives to Angola’s railroad system.

The infusion of money and lines of credit from China certainly diminishes the influence of the International Monetary Fund (IMF) and other actors that would like to promote economic reform and liberalization in Angola. Yet this should not be exaggerated, as Angola remains interested in having its debt rescheduled at the Paris Club and continues to maintain a dialogue with the IMF. An IMF mission is scheduled to go to Luanda at the end of November to engage in further discussions. The World Bank also remains engaged in a number of areas, including the organization of petroleum management workshops in Angola in May 2006, which high-ranking Angolan officials attended.

The massive influx of Chinese businesspersons and companies into Angola has been received with a mixed response. Anecdotal evidence suggests that there is already a growing resentment of the Chinese presence in Angola. There has been talk of the “Chinese Invasion” and complaints that the Chinese are taking jobs and contracts away from the Angolans. Moreover, the Chinese have not been transferring skills or technology to the Angolans, raising the question of what happens once a project is completed. Others, including those at high levels of government, have criticized the quality of the goods and services that Angola has been receiving from China. As potential evidence of the growing tensions between the two countries, President José E. dos Santos chose to visit Moscow with a high-powered delegation, while sending his Prime Minister to the recent China-Africa Cooperation Forum (FOCAC) summit in his stead. Whether or not this was a signal to China is difficult to tell. President dos Santos does not particularly like to sit in large meetings of leaders wherever they might gather, but one would understand if the Chinese were to interpret his absence as a rebuff.

China is in Angola for the long haul—or at least as long as the oil continues to flow—but the same can be said about other countries. The Chinese now have significant equity-stakes in offshore oil and in the construction of an oil refinery, which will remain even if their other construction projects were to taper off. At the same time, the Chinese can expect the Angolans to become more insistent on quality performance and the transfer of skills and technology in the same way that the oil companies are expected to train Angolan nationals and outsource to Angolan companies. If anything, the absence of President dos Santos at the FOCAC summit was a warning to Beijing that nothing should be taken for granted in Angola, even by China.