BMI View: A Petrobras-Sinopec collaboration to expand Brazilian refining capacity would be an important development in Petrobras' efforts to support its unprofitable downstream segment. While details are scant, the benefits of such collaboration would be dependent upon the nature of the agreement, primarily in terms of exactly what percentage of refined products output w ould be earmarked for export to China.
Petrobras' CEO Maria das Gracas Foster has been in talks with China Petroleum & Chemical Corporation (Sinopec) over a partnership to increase Brazilian refining capacity. It appears that a final deal has not yet been reached, with conflicting media reports suggesting that Petrobras is seeking assistance to finish work on two refineries in north-eastern states , or might want help to build a new one entirely. While these details are of critical importance , perhaps the most significant aspect of the deal will pertain to what Sinopec can hope to receive in return for its investment. Indeed, Brazilian consumption of refined products has and will continue to outpace planned refining capacity, and as such, any production earmarked for export to Chin a will detract from the net benefits to the Brazilian downstream segment.
|Refining Capacity To Continue Lagging Consumption|
|Brazilian Refining Capacity And Oil Consumption, 2001-2021|
We have long been highlighting the negative dynamics in the Brazilian downstream segment. For Petrobras, its primary challenge is that as country's only downstream player, not only does it have insufficient refining capacity, but it has also been forced to purchase gasoline for consumption at global market prices and then sell it domestically at a loss due to price controls . These losses have been weighing on the company's ability to invest in its upstream activities, including its capital-intensive efforts to monetize its massive deepwater and ultra-deepwater reserves, leading to a more broad-based weakening of the company's performance. For its part, the government has allowed for incremental price increases to try to reduce Petrobras' exposure to these unfavourable dynamics, but they are insufficient to correct them altogether ( see our online service, January 18 2013, 'Fuels Pricing Flexibility Supports Our Cautiously Optimistic Outlook For Petrobras' ).
Sinopec's Foreign Investment Strategy
For its part, Sinopec and other Chinese national oil companies (NOCs) have been making significant investment s abroad recently, including large mergers & acuisitions ( M&A ) deals and expanding their acreage holdings in unconventional plays in the US and Canada ( see 'Sinopec Confirms Appetite For Mississippian Lime' , February 26 2013 ). China has also recently become Brazil's largest trading partner, in addition to the signing of a US$10bn, 10-year loan deal with Petrobras via the China Development Bank. Under the terms of this agreement, Petrobras will provide Sinopec with 200,000 barrels per day (b/d) through 2019. Furthermore, Petrobras is looking to the Chinese to build four production platforms for use in the offshore Santos Basin.
|Chinese NOC||Company of Interest||Asset/Type||Value/Equity Stake|
|Source: BMI Research|
|PetroChina||Royal Dutch Shell||Groundbirch, British Columbia||20%|
|Sinopec||Devon Energy||5 US shale fields||US$2.2bn|
|PetroChina||Encana||Duvernay shale assets, Alberta||49.90%|
|CNC||Chesapeake||Eagle Ford Shale, Wyoming, Colorado||US$2.4bn|
|Sinochem||Pioneer Natural Resources||Wolfcamp Shale JV||US$1.7bn|