China eyes Argentina’s mining bonanza

China to develop huge Vaca Muerta shale reserve despite concerns about water use and pollution

Argentina is set to become China’s new mining market as the energy-thirsty giant hopes to benefit from the promises of the country’s enormous oil and gas bounty. Both countries inked an agreement to boost investment at the China Mining 2014 fair in the northern city of Tianjin in October 2014. Representatives of the Argentine government met with senior executives of China’s largest mining companies, namely Minmetal, Chinalco, Shandong Gold, NFC, and Zijn. Argentina can satisfy China’s commodities needs as it is the world’s largest producer of lithium, the second largest producer of borates, the third largest producer of silver, the fourth largest producer of copper and the fifth largest producer of gold. It also has more than 800 million tons of potassium resources. Beijing, the planet’s second-largest oil consumer and importer, has invested US$15 billion in Argentina, especially in oil. In addition, both governments are discussing the construction of a US$750 million copper refinery in Argentina. China is unlikely to lessen its growing demand for and consumption of energy. From June 2012 to June 2013, it imported the highest amount of iron ore –743 million metric tons or an 8% increase in a year.

Mineral Eldorado

The China-Argentina agreement comes a few months after the Argentine shale gas formation, called Vaca Muerta (“dead cow” in English), was estimated to hold one of the most important gas resources outside the United States. This gigantic deposit in Neuquen Province in remote Patagonia contains 802 trillion cubic feet of technically recoverable gas. It also has the fourth largest shale oil reserves – roughly 27 billion barrels of technically recoverable oil. This gas and oil bonanza is buried three kilometers beneath the surface. “Chinese companies are very interested in investing,” says Ernesto Fernández Taboada, Executive Director of the Argentine China Chamber of Production, Industry and Commerce in Buenos Aires. In particular, Bridas Corporation, an oil and gas exploration and development company owned by the Argentine fossil fuels producer Bulgheroni and the Chinese oil company CNOOC, announced a US$500 million investment to exploit Vaca Muerta’s 663 kilometers square oil shale zone in October 2013. Taboada explains that the total amount of Chinese investment in oil and gas is unknown at this stage. Chinese companies have ordered field studies in Patagonia to determine the level of investment needed to extract the riches. So far, the American multinational Chevron and Argentina’s state-owned energy firm YPF invested US$2.5 billion in Vaca Muerta, according to a YPF statement released in November 2014. Unlike China, Argentina is an ideal minerals extraction spot due to its low population density – 15 people per square kilometer – and enormous water resources.

Fracking, the path to economic recovery

Argentina needs foreign oil and gas companies to drill into the country to get the capital needed to tackle one of the highest currency inflation rates. The country has difficulties getting financing from abroad and thus urgently needs foreign investment, especially from China. YPF, in particular, needs foreign help to exploit Vaca Muerta due to the magnitude of the reserves. Argentina hence has resorted to controversial methods, namely hydraulic fracturing or fracking, which can boost energy exports but can also generate great environmental damage, such as water contamination. Fracking is a large-scale extraction technique that drills down deep into the earth to release the gas rocks contain. Water, sand and chemicals are injected into the rock at high pressure, which enables the gas to flow out of the well. “The difference between traditional and unconventional extraction basically [lies in] the large volumes of water, sand and additives that are used,” explains Ruben Etcheverry, President of Gas and Oil of Neuquen, the local energy company in the province where Vaca Muerta sits. “The exploitation of non-conventional hydrocarbons requires a large amount of water for traditional production,” he says. Environmentalists contend that fracking creates waste liquids filled with toxic chemicals. They say that it pollutes aquifers with methane gas, can indirectly cause earthquakes, and is detrimental to human and animal health. In light of this, an Argentine court demanded that YPF stops its fracking activities in the Chubut province in March 2014 after reviewing allegations of water contamination. Chinese mining companies could worsen environmental degradation because China does not have any fracking laws to protect groundwater and other natural resources. Also, Chinese companies have not adopted international conventions on environmental protection as they know it is difficult for the PRC government to monitor their activities abroad. This is a significant source of concern in Argentina – and Latin America – because there are already fewer and weaker environmental regulations than in developed countries. For instance, Argentina ratified a new hydrocarbons law  in October 2014 but critics pointed to the lack of regulation on the environment preventing the potential damages of fracking. “Fracking is not good or bad: it depends on how it is done,” says Taboada. “Chinese companies need to comply with Argentine norms like YPF does,” he adds. Yet, a June 2014 report titled “Heading South: The Dash for Unconventional Fossil Fuels in Argentina”  and published by Friends of the Earth Europe explains how multinationals are putting pressure on the Argentine government to pass more flexible environmental laws to extract unconventional fossil fuels.

It rings a bell

Mexico is also prone to the dangers of fracking and water contamination due to the activities of Chinese mining companies in the country. The U.S. Energy Information Administration lists Mexico as the sixth market with technically recoverable shale gas resources. To stimulate the Sino-Mexican mining relationship, Mexico’s President Enrique Peña Nieto signed a US$14 billion investment package with his Chinese counterpart during a state visit to attend the Asia-Pacific Economic Cooperation (APEC) summit in Beijing in November 2014. This included a US$2.4 billion fund for mining and energy, among others. Yet, Chinese companies’ fracking activities could be significantly detrimental to the environment as Mexico – along with South Africa – is the country that could delay the most the exploitation of shale resources because of water shortages, according to the World Resources Institute. This Washington-based research organization ranked countries based on how vulnerable they are to water scarcity and the magnitude of their reserves. Mexican shale gas reserves, which hold 545 trillion cubic, are in the deserts. In addition, fracking in Mexico requires 7.5 million to 30 million liters of water for each well, according to statistics from the national regulatory agency. This is a huge amount considering that 10 wells would need 25 million to 40 million liters of water.

A first step

Chinese mining companies are known for their lack of environmental regulations and poor labor standards throughout Latin America. Yet, despite weak or inexistent regulations on fracking in Argentina and the region, there has been growing awareness of the need to protect the environment in China. In November 2014, Chinese President Xi Jinping and his American counterpart Barack Obama inked a climate deal to curb carbon emissions at the APEC summit. The PRC government has been pressed with tackling skyrocketing pollution levels, which might be a first step toward addressing the environmental havoc Chinese companies cause overseas.