Chinese investment in global oil projects continues to roll along at a staggering pace. The latest investment comes from China oil giant China Petroleum & Chemical, or Sinopec, (NYSE: SNP), which is buying a 40% stake in Repsol Brazil, the upstream subsidiary of Spain’s Repsol YPF (NYSE: REP), for $7.1 billion. Sinopec has agreed to buy 100% of a new share issuance that raises Repsol Brazil’s valuation from $10.7 billion to $17.8 billion.
This is the second major deal for Sinopec in Brazil this year. In May the company agreed to lend Petroleo Brasileiro, or Petrobras, (NYSE: PBR) $10 billion in exchange for a 10-year supply of crude oil. Petrobras also gave Sinopec the rights to explore two of its offshore blocks. Sinopec has also held talks with Brazil’s OGX Petroleo e Gas Participacoes (OTC: OGXPY) regarding a joint bid for additional offshore assets.
Repsol Brazil owns rights to develop 11 blocks in the major deepwater oil basins offshore Brazil. The company said in its announcement of this deal that it is now “fully capitalized to develop all of its current projects in Brazil.”
The agreement allows both Repsol Brazil and Sinopec to expand their activities in Brazil either jointly or separately. It’s a pretty safe bet that Sinopec will do so, whether with OGX or another company.
Sinopec is China’s largest crude oil refiner and product marketer. However the company buys as much as 70% of crude oil it refines. Chinese refiners face the same major problem that U.S. refiners do: as crude prices rise, refining margins fall.
The Chinese government has, on more than one occasion, repaid Sinopec for losses it incurred by selling gasoline at state-ordered prices that were too low for the company to break even, much less make a profit. The government has raised gasoline prices this year, so this is not as big an issue.
Yet the government wants to keep fuel prices modest because it is one way that it can spread its booming import-driven wealth to more citizens. Low gasoline prices also boost automakers, another industry that the Chinese government supports, mainly through a continuing supply of low-cost labor.
Shares in Repsol are up nearly 7% in pre-market trading this morning. In Madrid, Sacyr Vallehermoso, which owns 20% of Repsol, has seen its shares rise more than 12%.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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