Repsol to Sell Brazil Assets to Sinopec for $7.1B

MADRID (Dow Jones Newswires), Oct. 1, 2010

In one of the largest Chinese oil acquisitions to date, Spain's Repsol Friday announced the sale of 40% of its Brazilian assets to China Petrochemical Corp., or Sinopec Group, for $7.1 billion.

The joint venture, valued at $17.8 billion overall, guarantees Repsol key funding to explore vast and coveted offshore oil fields in South America's biggest economy.

The transaction is also another sign of China's growing prominence on the international energy scene, as it expands its access and ownership of raw materials needed to back the country's economic expansion. The biggest oil takeover by a Chinese firm to date has been Sinopec Group's $7.2 billion acquisition in 2009 of Addax Petroleum Corp., based in Switzerland, only slightly more than the venture announced Friday.

The joint Brazilian operation stands as one of Latin America's largest foreign-controlled energy ventures, as it will develop some of the world's most important exploratory discoveries in recent years, Repsol said in a filing with the stock market regulator. Repsol will have controlling interest in the joint venture with a 60% share.

At the center of the deal is Repsol's holdings in the coveted subsalt area offshore Brazil, which had been anticipated to constitute a long-term cashcow for the Spanish oil giant.

The subsalt play is exceptionally expensive because the oil is found in water depths of more than 2,000 meters and several thousand meters further under the sea bed below layers of sand, rocks and salt. Repsol has said previously that bringing its Brazilian subsalt oil finds into production could cost between $10 billion and $18 billion. Friday's deal eliminates the need for an initial public offering of its Brazilian stake they company had contemplated, Repsol said.

"With this new investment, Repsol Brasil is fully capitalized to develop all of its current projects in Brazil, including world class discoveries in the Guara and Carioca pre-salt basins," Repsol said in a press release.

Analysts at Banco BPI in Portugal said the sale to Sinopec gives a "surprisingly high valuation" to Repsol's Brazilian assets, pricing them at 19% above the bank's valuation.

Friday's deal is the latest significant international energy transaction involving Chinese players. In June, the International Energy Agency said that overseas investments by China's national oil companies in 2010 look as if they will outpace by far the $18.2 billion spent in 2009, and that was before the Repsol-Sinopec announcement. From January 2009 to April 2010 alone, the three majors--China National Petroleum Corp., Sinopec and Cnooc--spent around $29 billion worldwide to acquire oil and gas assets, the IEA said.

Sinopec Group General Manager Su Shulin in August confirmed that the company, which is state-owned, was in talks with Brazil's OGX over a bid for offshore assets in Brazil.

Sinopec officials could not be reached Friday.

Brazil is a key target for Chinese investment, with resources deals worth $4.3 billion agreed so far this year compared with $362 million in 2009, according to data from Dealogic

Brazilian state oil company Petrobras also agreed to a $10 billion loan from China Development Bank last May in exchange for crude-oil supply to Sinopec over 10 years. Petrobras also gave Sinopec rights to explore two deep-water blocks in Brazil for oil and natural gas.

Repsol and Sinopec will continue their respective expansion plans in Brazil and will participate, jointly or individually, in future bidding rounds in the area, Repsol added.

Sinopec's Brazil entry frees up Repsol to allocate more exploration resources elsewhere in the world, such as in Western Africa which the company identified as one of its expansion areas. Repsol at the end of the second quarter had a net debt of EUR5 billion.

In its strategy to diversify from an over-reliance on single geographical areas in its oil and gas production, Repsol is also trying to sell a further stake in its Argentine YPF unit to either institutional investors or in an initial public offering. But the company so far has encountered more difficulties to strike a deal as most of the Argentine assets are gas or declining oil fields. Repsol holds close to 85% in YPF and said it wants to keep a majority stake in it.

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