Sinopec's $7 billion swoop on Brazil unit

(China Daily)
Updated: 2010-10-05 10:04
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Corporation pays 76% premium as focus switches to Latin America

HONG KONG - China Petrochemical Corp, also known as Sinopec, is paying a 76 percent premium to take a stake in Repsol YPF SA's Brazilian unit as the world's biggest energy user switches its hunt for oil reserves to Latin America from Africa.

The company, China's second-largest energy company, agreed on Oct 1 to pay $7.1 billion for a 40 percent stake in Madrid-based Repsol's unit, which has reserves in the same area as the biggest oil discovery in the Americas this century.

That amounts to $15 a barrel compared with the $8.50 Petroleo Brasileiro SA paid in September for assets in Brazil, said Neil Beveridge, an analyst at Sanford C Bernstein & Co.

"This shows the importance that China places on securing oil resources overseas," Beveridge said. "This is a key emerging deepwater basin and there are a lot of developments taking place. Sinopec has a good position established, but the price it has paid is very high."

Chinese companies spent a record $32 billion last year buying energy and resources assets abroad.

Sinopec's investment is the country's second-largest overseas acquisition and follows the company's purchase of Addax Petroleum Corp for C$8.3 billion ($8 billion) last year to gain reserves in Iraq's Kurdistan and West Africa.

Cnooc Ltd and State-controlled Sinochem Group have paid about $3.1 billion each for stakes in oil producers in Argentina and Brazil.

"South America seems to be a key area of focus at the moment," said Beveridge. "The focus has switched from Africa, and it's all part of China's desire for energy security and the exceptional growth in demand for oil."

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China consumed 8.6 million barrels of oil a day in 2009 compared with 4.47 million in 1999, according to the BP Statistical Review of World Energy.

The International Energy Agency estimates demand may reach 11.63 million a day by 2015.

"This puts a hefty valuation on reserves in Brazil," said Peter Hitchens, an analyst at Panmure Gordon & Co in London.

"It could read through into assets of BG Group Plc, the United Kingdom's third-largest oil and natural gas producer."

Brazil's state oil company Petroleo Brasileiro, known as Petrobras, issued about $42.5 billion of stock to the government in September in exchange for the rights to develop 5 billion barrels of oil reserves.

Beveridge estimates Repsol's assets in Brazil hold about 1.2 billion barrels of oil-equivalent.

Repsol had considered a plan to sell about 40 percent of the Brazilian business through an initial public offering. The company now won't be selling shares in the unit to the public, Madrid-based spokesman Kristian Rix said on Oct 1.

"For us, Brazil was way too large," Repsol's Chief Operating Officer Miguel Martinez said in an interview on Bloomberg Television. "Obtaining a partner was a move that was necessary." Repsol and Sinopec Group may work together in other areas in the future, he said.

Brazilian Reserves, Spain's biggest oil company, has stakes in Brazil's Santos and Espirito Santo basins and plans to invest as much as $14 billion there through 2019 in fields that may hold as much as 3 billion barrels.

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