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19/02/2009 | LatinAmerica - Loans-For-Crude

Stratfor Staff

Jose Sergio Gabrielli, the chief executive of Brazilian state oil firm Petroleo Brasileiro SA (Petrobras), has announced a pending deal with the China Development Bank, O Estado de S. Paulo reported Wednesday. Under the rough sketch of the deal that has been released, China would lend Brazil $10 billion to help pay for expensive deepwater energy development — and Brazil would repay the loan not with cash, but with oil. According to the report, the deal was to be at the top of the agenda when Chinese Vice President Xi Jinping arrived in Brazil on Thursday.

 

This apparently is only one of four loans-for-crude arrangements that Petrobras is discussing, and Brazil is certainly not the only country China is evaluating for such loans. On Tuesday, China sealed a similar deal with Russian state energy firms for $25 billion, over half of which Russia will repay with oil. It is not clear in either case what the price per barrel will be, but odds are it will be linked to whatever the current market price turns out to be.

Energy production is among the most complex and expensive efforts in which a country or company can engage. Brazil’s new crude reserves are not only several hundred miles off the coast, but also several miles deep and several more below the seafloor. Russia’s developed oil deposits — much less its undeveloped ones — are roughly at the corner of “no” and “where.” It takes literally thousands of miles of pipes to get this oil to Russia’s few ports.

Both Russia and Brazil are rather jealous of controlling their own oil production, but in the current financial climate, getting a funding boost from a state that has some extra cash makes a great deal of sense. And Russia and Brazil are hardly alone. There are no shortages of states facing capital crunches, and several of those states are more than a little jittery about allowing others to run their oil patches (Iran and Venezuela spring to mind.) And China is hardly the only oil-consuming country that would like to lock down future supplies. Considering their propensity for building large foreign exchange reserves and their lack of domestic oil supplies, most of the East Asian states likely are entertaining notions of loans like China’s.

But though this structure might make sense now to a state with plenty of oil but few investment funds, or to a country flush with cash but short on oil, it might not prove the best idea in the long run in terms of pricing. Assuming that potential spurts of nationalist fervor down the road do not nix these investment deals, the arrangements still represent a fair amount of crude getting locked down years — even decades — before it is even extracted. That spoken-for oil is no longer trading on the market with the rest of the world’s oil. On a normal day, reduced supply means both higher prices and greater volatility.

These contracts can work in one of two ways. First, the price of the reimbursement oil can be set at today’s prices — relatively low in recent terms — which would greatly upset the oil producer should prices rise again. Alternatively, the price could be set according to whatever “current” prices happen to be on the day the oil is delivered — in which case the very existence of these loans-for-crude deals will artificially raise the price for the lender.

Either way, with these loans-for-crude deals based on time horizons of up to 20 years, that is a factor that will complicate relations between countries like China and Brazil — not to mention the broader oil markets — for a long time to come.

Stratfor (Estados Unidos)

 


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