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Securing Energy Resources

Robert Hsu, May 26, 2009

In this Issue:

    With crude oil prices still sitting nearly 60% of its highs from last summer, Asia's biggest refiner China Petroleum & Chemical Corp. (NYSE: SNP), better known as Sinopec, took action last week to lock in a steady supply of crude oil at low levels. The company signed a deal, through Chinese and Brazilian officials, to explore Brazil for oil over the next five years.

    With Chinese President Hu Jintao and Brazil's Luiz Inacio Lula da Silva signing the agreement for this deal, Sinopec will work closely with Brazil's Petroleo Brasileiro SA, also known as Petrobras, paying $10 billion in loans to Petrobras in exchange for the oil. Sinopec will receive 150,000 barrels of oil a day through the end of the year and upgrade to 200,000 barrels a day starting in 2010 and lasting through 2019. Now, that's a lot of oil!

    Since Sinopec only produces 20% of the oil it needs -- the fields Sinopec has access to in China now aren't producing as much as before due to age -- this is a great deal for the company. Overall, it guarantees a constant supply of oil to the country.

    And the deal will be beneficial for Brazil and Petrobras as well. Petrobras has been looking for opportunities for financing since oil prices there plummeted almost a year ago. The company will be able to use the money to fund other exploration projects in the hopes of finding another Tupi field, the largest global oil discovery in over 30 years. Much of the oil provided in this deal to Sinopec will likely be sent from the Tupi field.

    With a steady flow of oil coming into China over the next decade or so, Sinopec will be able to build up its reserves and continue its operations of refining crude oil into gasoline and other products. State-owned Sinopec has benefited from government support in the past -- my Asia Edge subscribers' shares in Sinopec have gained about 40% since our purchase -- and this new deal with Brazil has the potential to add nicely to the company's bottom line going forward.

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