SAO PAULO (Dow Jones Newswires), May 18, 2009
Brazil's oil industry is turning to China for cash in the latest sign of how Beijing's clout is growing amid the global economic downturn.
Brazilian President Luiz Inacio Lula da Silva was set to arrive in Beijing Monday to meet with Chinese President Hu Jintao, who is expected to unleash billions of dollars of credit to help Brazil exploit its massive oil reserves. Brazil will return the favor by guaranteeing oil shipments to Chinese companies.
The nations are being thrust together by the global financial crisis. Brazil's state-controlled oil giant, Petroleo Brasileiro SA, wants to spend $174 billion over the next five years to elevate Brazil into the major leagues of oil-producing nations. With international capital markets on life support, China is among the few remaining sources of cash.
Petrobras, as the company is known, is turning to China at a time when China's appetite for raw materials has lifted economies across commodity-rich Latin America, blunting the impact of the global downturn. In March, China passed the U.S. as Brazil's biggest trade partner.
Terms of the arrangement had yet to be finalized before the Brazilian leader departed, a senior Petrobras official said, although a broad outline of the talks was announced by Petrobras earlier this year. On the table is a $10 billion loan in exchange for as many as 200,000 barrels per day. China's chief goal, however, is to use the loans to win deals to provide services and equipment at a time when Brazil is becoming tougher in dealing with foreign companies, industry experts said.
Even before a deal is done, the months-long negotiations between Chinese and Brazilian officials have illustrated a competitive advantage for China's government-backed companies at a time when credit markets are dry. Underscoring China's importance as a lender of last resort, Brazil engaged China even though many of its past investment initiatives with the nation have ended in disappointment.
"The U.S. has a problem," Sergio Gabrielli, chief executive of Petrobras, said recently when asked about the loan talks. "There isn't someone in the U.S. government that we can sit down with and have the kinds of discussions we're having with the Chinese."
Mr. Gabrielli was referring to the fact that Chinese government banks are willing to extend huge foreign loans to further China's long-term energy-security goals: ensuring diverse global supplies and winning entree into competitive regions for its oil companies. A string of recent oil loans to Russia, Kazakhstan and others has pushed China's total commitments to more than $45 billion.
Such direct government lending is an increasingly powerful tool in an era when three-quarters of the world's oil reserves are in the hands of state-controlled oil companies. By dealing directly with governments in oil-supplier nations, China can use its wealth to reduce the role of big oil companies -- the traditional intermediaries between oil producers and oil consumers.
"What you are seeing is the new geopolitics of oil, where deals start from a political understanding and cut out the international oil companies," says Roger Diwan, a partner at PFC Energy, a Houston-based consultancy.
To be sure, international oil companies such as Exxon Mobil Corp. and Royal Dutch Shell PLC have important advantages in technology and managerial know-how over state companies. Brazil's most tantalizing oil reserves lie miles beneath ocean, rock and unstable layers of salt. Getting it out likely will require the expertise and muscle of the industry's top companies.
What's more, China's willingness to fund oil projects should ultimately help the U.S. consumer, experts say. Most of the world's oil is sold on the international spot market to the highest bidder. China's willingness to extend credit to oil producers should keep prices from rising simply by increasing the global supply of oil.
Brazil's Petrobras, which is controlled by the government but operates with a free-market ethos and has shares trading on the New York Stock Exchange, is in an unusual position for the global oil industry after notching major oil and gas finds. The company is sitting on far more reserves than it has people and money to pump.
Brazil hatched an ambitious plan to change that, and it has vowed to make it happen even in the downturn. "It's willing to do deals where necessary," says Matthew Shaw, a senior Latin American analyst at Wood Mackenzie, a Scotland-based oil consultancy.
Copyright (c) 2009 Dow Jones & Company, Inc.
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