Petrobras to Get Chinese Dollars (PBR, SNP, XOM, CVX)

The China Development Bank appears to be following the maxim of uber-capitalist Warren Buffet: Be fearful when others are greedy, and be greedy when others are fearful. This week the Chinese announced an agreement to lend $25 billion to Russia for the construction of a crude oil pipeline that would provide them 300,000 barrels/day of crude for 20 years.  Now, the bank has announced an agreement to lend $10 billion to Petroleo Brasiliero, aka Petrobras, (NYSE:PBR) to develop the massive Santos basin discovery offshore Brazil.

In exchange for the loan, China Petroleum & Chemical Corporation, aka Sinopec (NYSE:SNP), will receive up to 100,000 b/d of crude from Petrobas  for 10 years.  China’s state-owned energy company, China National Petroleum Corporation (CNPC), may also be included, for another 60,000 b/d.

China’s quest for secure energy supplies has been going on for at least four years, pretty much ever since the country’s foreign exchange surplus started to explode. The country has already invested in Venezuela, Bolivia, and several African and Mideast projects. The deals share a common theme: Chinese cash in exchange for guaranteed supplies of oil and natural gas.

Every time China makes one of these deals, a hint of doom hits the US media. Is China going to buy up all the world’s oil and leave the US and the rest of the world without enough to meet their needs? Well, no, that’s not going to happen.

In the agreement with Petrobras, China will pay market prices for the oil it gets. As the price for crude rises (and it surely will), Petrobras makes more profit and, ultimately, could fund further development of Santos out of its own pocket. Or, more likely, it will find other partners, say, Exxon Mobil Corporation (NYSE:XOM) or Chevron Corporation (NYSE:CVX) that would like to toss a few billion in the pot in exchange for some barrels. As a result, China’s access to Brazil’s crude is only as strong as the current balance in the country’s checkbook.

At present, China has a large balance in its checking account, but with its exports falling and domestic demand drying up, it faces some serious economic problems of its own. The country’s ability to invest huge sums in energy developments going forward depends on a global economic recovery and an increase in domestic consumer spending.

Brazil has big plans for developing the Santos basin, and it is pushing Petrobras to make deals like this one with China. The estimated resource is 80 billion barrels, and Petrobras expects to spend nearly $175 billion in the next five years to explore and develop the field. Chinese dollars will prime the pump, but its not likely that they will buy the pump.

Paul Ausick
February 20, 2009