Who Has Dibs on Brazil's Oil?

China looks set to continue buying into Brazilian oil space but new laws could make existing concessions more attractive to investors

Allen Good 4 October, 2010 | 3:03PM

On Friday, Repsol YPF (REP) announced a joint-venture agreement with Sinopec Group, parent of publicly listed China Petroleum & Chemical, to develop Repsol's presalt discoveries in offshore Brazil. Sinopec plans to invest $7.1 billion for a 40% stake in Repsol's Brazilian business; Repsol will retain the remaining 60%. The deal values Repsol's Brazilian assets at $17.8 billion. Repsol previously planned a partial initial public offering of its Brazilian assets in order to raise the necessary capital for development. With the Sinopec deal, Repsol will not proceed with a public sale.

By partnering with Sinopec, Repsol gains a strong financial partner that should be able to contribute additional capital in the future to expand operations or pursue additional Brazilian presalt leases. However, Sinopec is not known for its offshore operating capability, so execution is likely to fall to Repsol. More important, the venture will allow Repsol to proceed in developing its promising Brazilian discoveries. Recently, Repsol's profitability suffered as a result of declining production in its Argentine division and a weak European refining market. The development of the Brazilian assets should provide a much-needed boost in the coming years.

The deal also continues the trend of Chinese state-owned energy firms acquiring overseas assets. Last year, Sinopec added resources in West Africa and Iraqi Kurdistan by acquiring Addax Petroleum for $7.2 billion. Other Chinese firms have also actively pursued resources throughout the world, including Canada, Brazil, and Argentina. Given limited opportunities in China and the financial backing of the Chinese government, we expect the trend of Chinese firms acquiring oil and gas firms outright or taking minority stakes to continue.

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About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.

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