Brazil and China, Oiling the Wheels of Business

RIO DE JANEIRO – China’s demand for energy has prompted it to embrace Brazil as a major oil partner, fueling the dramatic expansion of Chinese companies in the South American country. While some see this as a boost to the Brazilian economy, others fear that it poses a risk to this country’s future self-sufficiency.

China has been Brazil’s principal oil investor in the past three years, through China Petrochemical Corp (Sinopec) and Sinochem Corp (Sinochem), energy expert Adriano Pires told Inter Press Service. China, which is now Brazil’s main trading partner, has invested some US$15 billion, especially in purchases of assets in companies already operating in Brazil in offshore oil exploration and production.

“China’s strategy is to secure oil reserves to guarantee its supply,” said Pires, the director of the Brazilian Center for Infrastructure (CBIE). It is following the same plan in other Latin American countries, such as Argentina and Venezuela, and in other regions, like Africa, he said.

The Brazilian Export Promotion Agency reported that China intends to increase its strategic oil reserves by 60%, and is willing to go anywhere in the world to do this. According to CBIE, China’s involvement in Brazil’s oil industry started in 2010 when Sinochem bought 40% of the shares of Norwegian company Statoil in the Peregrino field, in the Atlantic ocean off the southern port city of Santos, in a deal worth $3.1 billion.

The same year, Sinopec invested $7.1 billion to take over 40% of the Brazilian subsidiary of the Spanish transnational Repsol.

In March this year, Sinopec 30% of Petrogal Brasil, which is responsible for the oil and gas exploration and production activities of Portugal’s Galp Energia in Brazil, for $4.8 billion.

Chinese capital also teamed up with Brazilian state oil giant Petrobras to develop offshore areas in the northern Para-Maranhao basin, and with Anglo-French oil company Perenco in the southeastern Espirito Santo basin.

Pires said the Chinese firms are also interested in acquiring shares in OGX, an oil company owned by Brazilian millionaire Eike Batista, who already has Chinese partners in his mining and metal businesses.

“Brazil is a source of oil and gas, which are strategic resources for sustainable growth in China, but we are also very interested in the Brazilian market,” Tang Wei, the head of the Brazilian-Chinese Chamber for Economic Development, told local media.

Pires said this interest is due to China’s need to supply its rising demand for fuel, partly to fill the tanks of the cars driven by the growing middle class.

China is the world’s second-largest oil consumer, at 9.5 million barrels per day (bpd), following the United States, which uses between 18 and 20 million bpd. In a few years, China is expected to take the lead.

In parallel with its economic activities in Brazil, China’s oil purchases have also grown. CBIE statistics indicate that China is the second-largest importer of Brazilian crude, after the United States, and again the trend predicts that China will overtake the US in the near future.

The Foreign Trade Secretariat of the Brazilian Ministry of Development, Industry and Commerce said exports of crude to China increased from 1.6 million barrels in 2001 to 50.6 million barrels in 2011.

China has set its sights on the recently discovered deposits below the salt layer at the bottom of the Atlantic ocean off the Brazilian coast, at a depth of over 7,000 meters. The 55 billion barrels of estimated recoverable oil in these reserves could make Brazil one of the world’s major oil exporters.

“China has no experience operating offshore oil platforms, so it leaves that side of things to Petrobras or Repsol,” which have more technical know-how for deep water drilling, Pires said.

Beijing’s strategy became plain in 2009, when the China Development Bank agreed with the government of then president Luiz Inacio Lula da Silva (2003-2011) to lend Petrobras $10 billion in return for guaranteeing Sinopec’s exports of crude to China, initially 150,000 bpd, rising later to 200,000 bpd, at market prices. The Brazilian business community takes a positive view of China’s prominent role, saying it makes the market more dynamic. China is also partnering Brazilian companies in the refinery sector and in production and distribution of equipment for crude oil exploration and extraction.

“There is no risk [in doing business with China]. It suits Brazil because it brings in money. It’s good business,” said Pires.

In contrast, the head of the Association of Petrobras Engineers (AEPET), Silvio Sinedino, is concerned that China’s appetite for oil and gas may lead to rapid exhaustion of these finite resources. AEPET advocates a return to monopoly status for Petrobras, which has been partly opened up to foreign capital. The association believes Brazil should not aim to be a big oil exporter; instead, it should ensure its own self-sufficiency, and any exports “should be marginal”.

“Countries like China and the United States are avid consumers of oil,” said Sinedino. “With such voracious, growing demand, our pre-salt reserves could run out in 15 or 20 years, when we could make them last at least 30 years.

“Brazil cannot become another Middle East for crude exports. We have to meet our own needs first, and sell oil as and when possible, protecting our national wealth,” he said, recalling the campaigns that led to the creation of Petrobras over half a century ago with the slogan “O petroleo e nosso!” (the oil is ours).

“Oil is not just any commodity. It has great geopolitical importance,” Sinedino said. AEPET “is sympathetic” towards the Argentine government’s expropriation of Repsol shares in order to take control of YPF, the biggest Argentine oil company.

China’s interests in Brazil include other sectors that are key to supplying its appetite for commodities, such as soybeans and iron ore.

(Inter Press Service)