Brazil and China Ink Oil Loan Deal During Inter-State Visit

China and Brazil Secure Oil and Loan Deals

China (the world's second largest oil consumer) has reached an agreement with Brazil's state-owned oil firm Petrobras to secure oil supplies for the next decade as well as a US$10 billion loan from the China Development Bank (CDB). The loan will be used to finance Petrobras investments in exploration and development of oil reserves and natural gas in areas such as the cluster of pre-salt discoveries in the Santos Basin, offshore Brazil. The supply agreement (which takes effect immediately) stipulates that Petrobras will supply Unipec Asia (a wholly owned subsidiary of state-owned Sinopec) with 150,000 b/d of oil in 2009 and guarantees daily exports of 200,000 b/d of crude oil to China from 2010—19. The price of oil exported to China would be based on market prices, according to José Sergio Gabrielli, CEO of Petrobras, while the interest rate on the loan would be 6.5%. Petrobras and Sinopec also reached a memorandum of understanding (MoU) on Sinopec exploring for oil in two areas in Brazil as well as on refining and petrochemicals and the supply of related goods and services, according to a statement by Petrobras.

The agreements are the culmination of a previous oil supply accord signed in February between Petrobras and Sinopec which laid the foundations for the oil loan and supply agreement (see China – Brazil: 20 February 2009: Brazil Signs Oil Supply Accords with China). Under the previous MoU the sales agreement for the supply of oil to Unipec Asia was set at between 60,000 b/d and 100,000 b/d, although the current agreement has doubled the volumes. The US$10-billion loan is also the largest Brazil has ever received from China, and has been accompanied by a framework deal for a US$800-million credit extension with the national development bank BNDES, which may indirectly benefit Petrobras. The loan and supply agreement will help cement relations between the two emerging economic powerhouses and build significantly upon the blossoming trade partnership that saw trade flows surge by an average of 50% between 2006 and 2008. Indeed, only last month China replaced the United States as the top trade partner of Brazil.

Outlook and Implications

However, the agreement reached differentiates from previous oil-for-loans deals signed between China, Russia, and Venezuela in that Petrobras will not repay the loan with oil itself but with revenue from oil sales to China. From the Chinese perspective the deal amounts to the same political aims of boosting China's long-term oil supply security through taking advantage of CDB’s bountiful foreign exchange reserves, now much sought after in the context of the drought in global credit markets. China has been keen to diversify oil imports away from countries outside the Middle East through these deals, while targeting countries where the future oil reserve potential is positive, leaving open the possibility of further development of oil supply agreements. China is also keen to take advantage of the surplus capacity in the global market in order to shore up access to supplies, which was difficult to do in the seller's market of the past few years. Indeed, the fall in crude prices has enabled Chinese NOCs to import crude cheaply, while the debts to China from major oil exporters promise more political leverage that the government can use in pursuit of China's wider policy goals in the target countries. The MoU with Sinopec also suggests that Chinese NOCs are looking to use the loan agreements to gain a competitive position across the oil supply chain vis-à-vis IOCs, despite their more limited technical expertise and managerial capabilities.

The deal comes into effect immediately and over the next few years will contribute to China's attempts to build up its strategic and commercial stockpiles of crude oil with the aim of preventing future supply disruptions and meeting demand when the domestic economy rebounds. Over the medium term, the deal will provide supplies to meet the expected boom in demand as the government's petrochemical stimulus programme (unleashed as part of the 4-trillion yuan economic stimulus package in November 2008) starts to take effect. For Sinopec the MoU on exploration promises access to upstream acreage which will help the company build its technical expertise and better diversify its operations away from the downstream, while cementing a crucial foreign partnership in Latin America, a relatively new market for the company, which has relatively few assets there. The loan deal will also ensure contracts for Chinese NOCs and service providers, helping them to maintain profits and offset the recent slowdown in domestic fuel sales.