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China to Stake Claim off Brazil’s Coast

Bottom line: China likely to stake a claim off Brazil’s coast through Libra pre-salt auction, but at a potentially high environmental cost for Brazil.

Analysis: Given the small field of potential bidders (just 11 companies were approved to participate in Brazil’s 21 October auction of the Libra pre-salt oil field), China will almost certainly be a participant in the winning consortium. In one respect, it may make for a perfect marriage: Chinese companies have cash to spend but little technical experience in ultra-deep pre-salt extraction while Petrobras (the mandatory operator) has the expertise but is wonting for capital. With a $6.8 billion mandatory signing bonus and costly exploration and development in the forecast, most analysts suspect it could take nearly 20 years before the winner of the October auction starts making a profit.

Yet the risks relating to such deep-water wells are not solely financial – they are also environmental. The Brazil China relationship could quickly sour if the eagerness of Chinese investors leads to an oil spill.  Although spills can happen to any oil company, including US and European majors, recent environmental problems involving China’s state-owned companies give cause for additional concern. Just six weeks ago, in August, the government of Chad shut down China National Petroleum Corp (CNPC) operations because of a large oil spill in a southern forest. More troubling is that fact that inspectors…

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