beyondbrics

China is putting down roots in the backyard of Petrobras, the newly-crowned share issue king of world stock markets, with the announcement of a $7.1bn oil alliance in Brazil between Sinopec and Repsol.

In the latest step in China’s global hunt for oil – and one of the more expensive – Sinopec, a state-owned oil and gas company, is to take a minority stake in the Spanish energy group’s Brazilian subsidiary in order to exploit its oil deposits in the country.

Sinopec will pay $7.1bn for 40 per cent of Repsol Brasil, with the remaining 60 per cent staying in the hands of Repsol, according to a statement from Madrid on Friday.

The capital will cover the cost of developing all of Repsol Brasil’s current oil projects, including discoveries in the same offshore oil fields that were the foundation of Petrobras’s $70bn share issue last week.

The price tag puts a value of $17.8bn on Repsol Brasil, which has net resources equal to 1.2bn barrels of oil equivalent in the country.

Sinopec has been pursuing Brazilian assets aggressively but its acquisition of an equity stake in an operating company is a departure for the Chinese group: it had previously signed a deal with Petrobras to buy 200,000 barrels of oil per day – roughly a tenth of Petrobras’s current oil production – from 2010 to 2019.

Earlier this year Sinopec also signed an MOU with Petrobras to explore partnerships in offshore blocks in Northeastern Brazil. Sinopec and Cnooc have been looking at buying a stake in OGX, a private Brazilian oil and gas company controlled by Eike Batista, Batista has said.

China considers access to oil and gas supplies a matter of national security as it is the world’s second-largest oil consumer, after the US, and produces less than half it needs domestically.

Repsol had been preparing its Brazilian operations for an IPO, but that plan will now be abandoned in favour of the Sinopec partnership. A Repsol spokesman told beyondbrics:

We’re very pleased with this deal because it’s not only giving us funds for development, but will give us the possibility of having a stable and committed partner when we develop further projects.

For China’s oil majors, a presence in Brazil’s offshore “pre-salt” fields – so called because the oil is trapped under several kilometres of seawater, rock and a layer of salt – could help them gain operating experience in technically challenging situations.

A clear signal of China’s desire to develop closer ties with Brazil’s oil sector was the naming of Industrial and Commercial Bank of China as a bookrunner for Petrobras’s share issue.

Repsol Brasil operates some of its field in partnership with Petrobras. Repsol’s first big pre-salt field due to come into production is Guara in 2013, the spokesman said.

Strategic investments by China in South America have multiplied in recent years, commonly taking the form of oil-for-loan deals or direct purchases of stakes in oilfields.

Cnooc purchased a stake in Argentina’s Bridas Energy in March for $3.1bn and a few months later Sinochem spent $3bn to buy a 40 per cent stake in a Brazilian oilfield from Statoil.

Related reading:
Sinopec to buy more upstream assets, FT
Brazil’s ATMs aim to drum up Chinese business, beyondbrics