BRICs and Motor Oil: China Seeks Oil Development in Brazil

Approximately 1.35 billion people use their fair share of resources, especially energy. The U.S. Energy Information Administration, (or EIA), has China alone accounting for half of the world’s oil consumption in 2011. China is the second largest consumer, as well as the second largest net importer of oil, coming behind the U.S. in both categories.

As a result, China is increasingly turning to national oil companies (NOCs) to find answers to meet their oil fueled needs. The country is expanding its overseas portfolio of oil projects. Today’s bid for the pre-salt oil field “Libra” in Brazil is a chance for CNOOC Ltd (NYSE: CEO) and China National Petroleum Corp., two of the eleven companies bidding for rights to develop the field, to enhance this process in Latin America.

“Pre-salt” oil is termed for the pre-salt layer in the earth’s make up. On its website, Petróleo Brasileiro (NYSE: PBR), or Petrobras, a multinational, semi-public company in Brazil explains that by using the pre-salt layer, drilling, and innovation, Brazil wants to produce over 1 million barrels of oil per day.

Source: http://www.eia.gov/countries/cab.cfm?fips=CH

Source: http://www.eia.gov/countries/cab.cfm?fips=CH

The Libra field has incredible potential. According to the BBC, the 579 square-mile, 1,070 foot-deep-field could contain 12 billion barrels of oil. Or, what Brazil’s oil regulator estimates in Bloomberg is 3 years worth of China’s oil consumption. Victory in the oil field can help China and Brazil. It can make Brazil a top oil producing country, as the BBC pointed out, while developing an important industry in China.

Being part of a developing industry means taking chances and deviating from the norm. Libra does not align with the usual palate of Chinese international energy investments. Oil equity analyst with JPMorgan, Caio Carvalhal, told Bloomberg that China will normally shell out more money for investment in production, not exploration assets. Only one well so far, has successfully drilled in the Libra oil field.

But it does match EIA’s analysis that China wants to diversify its energy supply, using any means available. Bloomberg says if China wins today’s bid for the Libra field, it would mark a change in Chinese oil policy. Rather than buying part of an existing oil production site, an NCO would be exploring — with guidance from Petrobras — a new production territory. The contract stipulates that $185 billion will be invested over 35 years. It will result in twelve to fifteen wells in an oil production-sharing model.

Other major international oil companies, such as Royal Dutch Shell Plc (NYSE:RDSA)(NYSE:RDSBare taking part in today’s auction according to Bloomberg, but not Exxon Mobil Corporation (NYSE: XOM) or Chevron Corporation (NYSE: CVX), and no U.S. company signed on.

Brazilian oil and infrastructure consultant, Adriano Pires told Barrons this opting out should not come as a shock to the Brazilian government “because the rules were designed to attract Chinese companies.” $7 billion is required upfront, and through Petrobras, the Brazilian state will have a heavy hand.

Before the wealth from reserves flows in, migrants are flocking to Macae, a village north of Rio de Janeiro, which is also the closest site to the Libra field. The BBC reports they are seeking work, capitalizing on Brazil’s flurry to train workers who can operate the rigs for the successful bidder.

Exxon Mobil has had a rough year to date on the stock chart. As one of the largest oil and gas players on the planet, the company has found it hard to obtain the kind of growth that investors want to see, and shares have edged down about 1.3 percent since January.

In comparison, Chevron looks pretty nimble, and has been able to post stronger production growth. This has helped drive Chevron shares up about 8.4 percent this year to date. Both have lagged the S&P 500 index. Exxon Mobil is scheduled to report earnings on October 31, and Chevron will report on November 1.

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