China's Hunger for Energy Grows
By SANTIAGO PEREZ, SIMON HALL And BERND RADOWITZ
In one of the largest Chinese oil acquisitions to date, Repsol SA of Spain announced the sale of 40% of its Brazilian assets to China Petrochemical Corp. for $7.1 billion.
The joint venture, valued at $17.8 billion overall, guarantees Repsol the funding to explore the vast and coveted oil fields off Brazil, South America's biggest economy, Repsol said in a statement. Officials at China Petrochemical, or Sinopec Group, couldn't be reached for comment Friday, when most corporate and government offices were closed for China's National Day holiday
The transaction gives China a piece of one of Latin America's largest foreign-controlled energy ventures. It is the latest sign of the country's growing prominence in the international energy sector as it expands both access to and ownership of raw materials needed to fuel the country's economic expansion.
The Repsol deal is only slightly smaller than the biggest oil takeover by a Chinese firm to date, Sinopec Group's $7.2 billion acquisition in 2009 of Addax Petroleum Corp., based in Switzerland.
At the center of the deal are Repsol's holdings in the coveted subsalt area off Brazil, which had been anticipated to constitute a long-term cash cow for the Spanish oil giant. The subsalt play is exceptionally expensive because the oil is found in water depths of more than 2,000 meters and several thousand meters further under the sea bed, below layers of sand, rocks and salt.
Repsol had said that bringing its Brazilian subsalt oil finds into production could cost between $10 billion and $18 billion. Friday's deal eliminates the need for the initial public offering of its Brazilian stake that the company had contemplated, Repsol said.
Meanwhile, analysts at Banco BPI in Portugal said the sale to Sinopec gives a "surprisingly high valuation" to Repsol's Brazilian assets, pricing them at 19% above the bank's valuation.
Repsol was Brazil's third-biggest hydrocarbons producer in 2009, and it has a leading position in exploration activities in Brazil's offshore Santos basin, where the Guara and Carioca fields are located. Repsol produces oil at the Albacora Leste field in the Campos basin, and it has a total of eight discoveries and other exploration blocks in the Santos, Campos and Espirito Santo basins.
Repsol and Sinopec will continue their respective expansion plans in Brazil and will participate, jointly or individually, in future bidding rounds in the area, Repsol added.
Sinopec's Brazil entry frees up Repsol to allocate more exploration resources elsewhere in the world, such as in Western Africa which the company identified as one of its expansion areas.
In June, the International Energy Agency said that overseas investments by China's national oil companies in 2010 looked as though they would outpace by far the $18.2 billion spent in 2009. From January 2009 to April 2010, the country's three state-owned oil majors—China National Petroleum Corp., or CNPC, Sinopec, and China National Offshore Oil Corp.—spent around $29 billion world-wide to acquire oil and gas assets, the IEA said.
In addition to those direct investments, CNPC and Sinopec were involved in 11 loan-for-oil deals with eight countries valued at $77 billion, and the companies entered contracts committing them to invest at least $18 billion in future exploration and development, mostly in Iraq and Iran, the IEA noted.
Brazil is an increasingly important target for Chinese investment, with resources deals valued at $4.3 billion agreed upon so far this year, compared with $362 million in 2009, according to data from Dealogic.
The Brazilian state oil company Petroleo Brasileiro SA, or Petrobras, also agreed to a $10 billion loan from China Development Bank last May in exchange for crude-oil supply to Sinopec Group over 10 years. Petrobras also gave Sinopec, the parent of listed unit China Petroleum & Chemical Corp., rights to explore two deep-water blocks in Brazil for oil and natural gas.
Sinopec Group General Manager Su Shulin in August confirmed that his state-owned company was in talks with Brazil's OGX Petroleo e Gas Participacoes SA over a bid for offshore assets in Brazil.
Under the deal announced Friday, Repsol will retain 60% of the Brazilian venture, which is valued at $17.8 billion following the stake sale agreement. The joint Brazilian operation will develop some of the world's most important exploratory discoveries in recent years, Repsol said in a filing with the stock market regulator.
Sinopec's junior role in Repsol Brasil, as the joint venture is called, marks the continuation of a strategy by China's resource companies to make their overseas investments more palatable by taking minority stakes with partners that have better long-term relations with the host country.
China's biggest oil refiner and fuel marketer, Sinopec Group, has been going overseas aggressively because it currently buys some 70% of the product it refines. For Repsol, with oil demand flat or declining in Europe, teaming up with Sinopec provides access to the biggest energy market in the world, where oil demand is expected to continue to soar.
The deal means Repsol Brasil is "fully capitalized to develop all of its current projects in Brazil, including world-class discoveries in the Guara and Carioca pre-salt basins," Repsol said in a news release.
Repsol and Sinopec Group will continue their respective expansion plans in Brazil and will participate, jointly or individually, in future bidding rounds in the area, Repsol added.
Repsol shares rose 4.95% to close at €19.83 in Spain. Shares in construction company Sacyr Vallehermoso SA, which owns 20% of Repsol, gained 13%, rising to €4.96.
Write to Santiago Perez at santiago.perez@dowjones.com, Simon Hall at simon.hall@dowjones.com and Bernd Radowitz at bernd.radowitz@dowjones.com
