January 13th, 2011 - China Petrochemical Corp., best known as Sinopec, has bought itself a yellow brick road in the American continent through a series of deals that will likely not only shuffle China’s energy sector, but also alter a broader global scramble for oil assets.
The most recent –and perhaps most significant- was signed last week on the sidelines of a high-level official Chinese visit to Spain and involves a partnership to pursue global investment opportunities with Spain’s largest oil company Repsol, which operates in almost every country in the continent, from Canada, all the way down to Argentina.
Sinopec, China’s biggest refiner, and Repsol, with more than half of its oil and gas production assets in Latin America, have “significant synergies” and “the relationship between both companies is ideal to continue reinforcing our alliance worldwide in new business areas,” said Repsol Chairman Antonio Brufau after meeting his Sinopec counterpart Su Shulin in Madrid.
The two appear to make a perfect match. Repsol needs Sinopec’s cash to develop a series of recent discoveries and even to rebuff any potential takeover attempt. And Sinopec will be well served by Repsol’s historic roots in Latin America, its technology, and its prized assets, especially in Brazil and the Gulf of Mexico.
Chinese companies have been trying to use Repsol to penetrate the continent for some time, but the company and the Spanish government resisted investment offers from CNOOC, CNPC, and Sinopec in 2006 and 2007. But Spain’s dire economic situation, and China’s robust support in the form of bond purchases worth around $50 billion, seemed to have finally triggered a change of heart.
“China’s larger interest — and the reason for its offer of assistance to Madrid during the current economic duress — in fact has very little to do with Spain or the wider European market, but rather concerns Spanish energy assets in Latin America and particularly Repsol’s presence on that continent,” wrote Stratfor, an Austin-based security consulting firm, in a recent note.
It was only until last October that Sinopec and Repsol announced their first deal, which was only finalized late last year. Sinopec bought a 40% stake in Repsol’s Brazilian operations after entirely subscribing a $7.1 billion capital hike. Repsol pocketed a capital gain of $3.8 billion and one of Latin America’s biggest energy companies valued at $17.8 billion was created.
Sinopec expects the Brazilian venture to eventually produce at least 200,000 b/d, but Repsol’s assets in oil-rich Brazilian offshore fields are still years from being fully developed. More importantly, analysts say Sinopec is equally interested in using its new partnership with Repsol to expand in the continent, especially in upstream.
“Sinopec is desperate to maximize upstream equity business, in particular in Latin America and Africa,” said Keun-Wook Paik, London-based associate fellow of think tank Chatham House, and an expert in the Chinese overseas energy expansion. “Latin America is very important for China. I think that it’s as important as Africa,” which in 2009 supplied roughly 30% of China’s oil imports, compared to around 2.5% from Latin America.
Sinopec last year also bought Occidental Petroleum’s assets in Argentina for $2.45 billion. They currently produce a discreet 50,000 b/d, but include 393 million barrels in proven and probable reserves. In Venezuela, Sinopec also took a 40 percent stake in two Orinoco Basin fields that will each produce 200,000 b/d, and it agreed to build a refinery configured for heavy oil with a capacity of 200,000 b/d.
But Repsol, the largest private energy company operating in Latin America in terms of assets, offers unmatched expansion potential for Chinese companies. Just in Brazil, the new alliance has over 30 exploration and production assets off the coast, “which include some of the world’s largest exploratory discoveries in recent years,” according to a Repsol press release.
Analysts say Sinopec is playing catch-up with its Chinese rivals in the upstream business, especially to secure more supplies for its refining operations. Sinopec is also aggressively pursuing the oil product marketing business, expanding its operations in the continents and hiring more traders. - Energy Tribune
