China's Entry into Brazil Unlikely to Feature Subsalt Area

RIO DE JANEIRO (Dow Jones Newswires), May 19, 2009

The entry of China Petroleum & Chemical Corp. (SNP) into Brazil is unlikely to feature the country's promising subsalt region, a spokeswoman for state-run energy giant Petrobras (PBR) told Dow Jones Newswires.

Earlier Tuesday, China's National Energy Administration Chairman Zhang Guobao told reporters in Beijing that Brazil would offer two oil field blocks to Sinopec, as the Chinese state company is known, to strengthen energy cooperation between the two countries. He didn't give any further details about the blocks.

Petrobras' press office said that the company was not sure whether the blocks Zhang referenced belonged to the company or remained in the hands of the Brazilian government.

"What we know internally is that the blocks in question do not involve the subsalt region," the Petrobras spokeswoman said.

Brazil's Mines and Energy Minister, however, said that any exploration or production blocks involved in Tuesday's accords between Petrobras and Chinese entities would have to come from Petrobras' acreage.

"There exists no offer of unauctioned blocks for any Chinese company that have not been auctioned," a spokesman for the Mines and Energy Minister said. More important, Brazilian law prohibits the transfer of any E&P blocks without a concession auction -- not even to state-run Petrobras.

According to the Mines and Energy Ministry, Petrobras could transfer or sell stakes in blocks the company has already won at concession auctions held by Brazil's National Petroleum Agency, or ANP. Any transfer, however, would be subject to approval by the ANP.

"Petrobras could sell stakes or form a partnership to explore blocks with any company or entity it wishes, as long as it's approved by the ANP," the Mines and Energy Ministry spokesman said.

The possible transfer of some of Brazil's oil wealth to a Chinese state company will also likely draw questions from members of the Brazilian Senate, who launched an inquiry into alleged accounting and "irregularities" at the company last week.

Petrobras has come under fire for a tax-accounting change that resulted in a tax credit in the first quarter. The Government Accounting Office also said a refinery project had heavy cost overruns.

The recent discovery of massive oil deposits under a thick layer of salt offshore Brazil has also stoked nationalistic fervor. The country suspended auctions of offshore E&P acreage after Petrobras announced the Tupi discovery in the Santos Basin, which is estimated to hold between 5 billion and 8 billion barrels of oil equivalent.

A May Day ceremony commemorating the first oil pumped from a Tupi well test echoed with shouts of "the oil is ours," a rallying cry by nationalists in the 1950s when Petrobras was first created.

China's entry into oil exploration and production in Brazil was announced during Brazilian President Luiz Inacio Lula da Silva's official state visit to China. Earlier in the day, Petrobras and China Development Bank finalized a 10-year, $10 billion financing agreement.

The much-anticipated loan package will be used to finance Petrobras' $174.4 billion 2009-2013 investment plans, Petrobras said. The financing will also fund purchases of goods and services from Chinese companies.

Petrobras and Sinopec also ramped up an oil supply deal that the two companies made in February, when the memorandum for the financing package was signed. Sinopec's Unipec Asia unit will receive 150,000 barrels of crude a day in the first year, rising to 200,000 barrels a day in the next nine years.

Petrobras and Sinopec also signed a memorandum of understanding to cooperate in exploration, refining, petrochemicals and supply.

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