beyondbrics

It is hard to say no to a trillionaire. That is what Brazil and its oil industry partners are finding as China continually steps up to the plate to provide much-needed capital for the development of giant ultra-deepwater discoveries near Rio de Janeiro.

China’s second largest state-controlled oil major Sinopec has signed a $5.2bn deal to buy 30 per cent of the Brazilian assets of Galp Energia, which include operations in the pre-salt fields, so-called because they lie under two kilometres of the stuff.

The deal is Sinopec’s second acquisition in the area after its $7.1bn investment in the Brazilian assets of Repsol YPF last year. Sinopec has also signed a $10bn oil-for-loan deal with Brazil. Elsewhere, Sinopec’s peer, Sinochem, has a $3.1bn stake in an offshore oil field in Brazil run by Norway’s Statoil.

These deals are among the largest in the sector in Brazil but they represent not even a fraction of the firepower China could bring to bear on the country’s oil sector. PetroChina, the country’s biggest oil producer, and Cnooc, its third largest, have yet to make significant inroads into Latin America’s largest economy. This could happen if BG eventually sheds part of its holdings in the pre-salt to raise capital for the enormous development costs of what is one of the oil industry’s most technical undertakings.

Just how big these costs are is shown by Petrobras’ capital expenditure plan. Even after being reined in by the government, the company is still planning to spend $225bn over the next five years, probably the biggest corporate investment programme in the world.

This does not include the capital that will have to be committed by Petrobras’ partners in the fields, which include not only other operators but oil services firms, equipment makers, shipping companies, research institutes and a host of others.

Just as the crisis-hit eurozone views China with its trillions of dollars in foreign reserves as a bottomless pit of money and has gone to Beijing with begging bowl in hand, Brazil may come to see the Asian country as the ultimate underwriter of its pre-salt project.

But it is a partnership that will be fraught with difficulties with Brazil already growing suspicious of its increasingly close relationship with Beijing. China is now Brazil’s largest trading partner and last year was its biggest investor.

If Chinese state-owned companies are involved at every level of the pre-salt programme, Brazil may start to wonder whether it is ceding too much influence to a foreign government over what is considered a highly strategic asset.

So strategic, in fact, that former president Luiz Lula da Silva changed the law to give Petrobras the status of sole operator of the area. In one of his other last acts as leader, Lula da Silva also changed the land law to prohibit foreigners from acquiring large tracts of farmland, a measure seen as aimed at China.

His government and this one have passed numerous other measures directed at Chinese imports. The most brazen was a recent increase in a tax on imported cars that came just as Chinese producers were beginning to make inroads into the local market.

It may be hard to say no to China but Brazil has done it before. Can it afford to do so with pre-salt? Only time will tell.

Related reading:
The New Trade Routes: Brazil & China,
Redback vies for share of Latam trade, beyondbrics
China-Brazil file, beyondbrics
The New Trade Routes: Latin America
Latin American global trade, FT interactive graph