Date
17 August 2018
Brazilian troops block access to a Rio de Janeiro hotel where an auction for the right to develop a deepwater oilfield that could hold up to 12 billion barrels was held Oct. 21. Photo: Bloomberg
Brazilian troops block access to a Rio de Janeiro hotel where an auction for the right to develop a deepwater oilfield that could hold up to 12 billion barrels was held Oct. 21. Photo: Bloomberg

China wins joint bid for century’s biggest oil find

More than a thousand Brazilian troops were reportedly deployed around the beach front Rio de Janeiro hotel where last Monday China’s CNOOC and China National Petroleum Corp. (CNPC) won development rights in a joint bid to develop a massive deepwater oilfield.

The two Chinese state-owned oil companies joined Royal Dutch Shell Plc., France’s Total S.A. and Brazil’s state-owned Petroleo Brasileiro S.A., or Petrobras, in the winning consortium as local unions and demonstrators tried to stop the auction, calling it “a sell-out of precious national resources to foreign interests”, according to Reuters. Security officials fired tear gas and rubber bullets to disperse protesters.

The Libra offshore oilfield could hold up to 12 billion barrels, or three years of China’s consumption, Brazil’s government said. Libra is part of a larger deposit discovered six years ago that could hold reserves of as much as 100 billion barrels. If and when the fields pay off, Brazil would become the world’s fourth-largest oil producer, behind Russia, Saudi Arabia and the United States. Brazil currently has 15.3 billion barrels of proven reserves, the second largest in South America after Venezuela.

Despite the high octane baijiu that is sure to be flowing in celebration, China won’t be seeing oil from Libra anytime soon.

The Libra oil reserve lies 185 miles off Brazil’s southeast coast beneath a 2.5 mile layer of shifting rock, sand and salt under harsh Atlantic waters more than a mile deep. The technological challenges are formidable, given that deepwater wells of even 500 feet present enormous problems to fix.

In the shorter term, China stands to gain deepwater drilling know-how from partner Petrobras, the world’s biggest oil producer in waters deeper than 1,000 feet. CNOOC and CNPC have little experience in deep well drilling, in the past preferring to buy into operating fields and more advanced exploration projects.

Royal Dutch Shell is no slouch either when it comes to deepwater experience. Its new ultra-deepwater drill ships, scheduled for mid-2015 delivery, are said to have advanced capabilities, designed to operate in water depths of up to 12,000 feet and drill wells up to 40,000 feet.

“The Chinese usually prefer to pay a bit more for production” rather than exploration assets, Caio Carvalhal, an oil equity analyst at JPMorgan Chase & Co., told Bloomberg by phone.

Royal Dutch Shell and Total will each have 20 percent of the partnership, while CNPC and CNOOC will each have 10 percent. The consortium will need to spend upwards of US$500 billion over the next 12 to 15 years before Libra starts to produce. Brazilian state-run oil company Petrobras took the remaining 40 percent, as part of a deal that it must lead development of the field as operator.

Brazil estimates it will receive US$400 billion in taxes and other revenue from Libra over 30 years, as well as about US$7 billion up front from signing fees. CNOOC and CNPC will need to pony up their share of the signing fees, about US$690 million each, within a month.

Chinese oil companies are pushing to meet government mandated expansion targets, inking deals across Africa and in Latin America.

Since 2010, China has picked up developed assets or fields with advanced exploratory activity in Ecuador, Argentina, Venezuela, Brazil and Colombia, said Bloomberg. Sinopec, which with CNOOC and CNPC make up China’s big three oil companies, did not bid in the auction.

According to the Washington Times, China rescued Petrobras in 2009, when the oil company was looking at tight credit markets to finance a record-setting US$224 billion investment plan. China’s national development bank offered a US$10 billion loan on the condition that Petrobras ship oil to China for 10 years.

China’s relationship with Brazil amazingly dates back to 1812, when Queen Maria I of Portugal, then based in Brazil, imported Chinese laborers to work on a tea plantation near Rio de Janeiro. China became Brazil’s largest trading partner in 2009.

Ray Kwong is a China commentator. He writes on China for Forbes. He is also a China business development strategist and marketing consultant.

– Contact the writer at [email protected]

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A strategist and marketing consultant on China business

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