Brazilian state-run energy giant Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras, said late Wednesday that it would sell a 40% stake in Sao Paulo state natural gas distributor Gas Brasiliano to Companhia Energetica de Minas Gerais (CIG, CMIG4.BR).

Petrobras will retain a 60% stake in Gas Brasiliano, which it acquired for $250 million from Italy's Eni SpA (E, ENI.MI) in 2010, through the federal oil company's Gaspetro natural gas subsidiary, the company said. No value for the deal was disclosed. Petrobras declined to comment further on the deal because it still needs to be approved by regulators. Cemig also declined to comment.

"The agreement provides for new investments in [Gas Brasiliano] and the joining of Cemig in the distributor's capital," Petrobras said in a statement. The deal is expected to be completed in 2012, Petrobras said.

The deal will help expand both companies' presence in the key industrial heartland of Sao Paulo state, a key market to be tapped to boost natural gas consumption--especially in the industrial sector. Gas Brasiliano supplies natural gas to industrial, commercial, residential and transportation companies in 375 cities and towns in Sao Paulo state. In 2010, Gas Brasiliano recorded sales volumes of 650,000 cubic meters a day, with a distribution network of 750 kilometers.

Petrobras plans to build a fertilizer plant in Cemig's territory in southern Minas Gerais state that will use natural gas as the main raw ingredient. The oil company has also been ramping up its gas distribution assets in recent months as it attempts to expand the use of natural gas in Brazil. The company expects a surge in natural gas production as recently discovered offshore oil reserves, which are rich in natural gas, come onstream.

Sao Paulo state regulators approved Petrobras's purchase of Gas Brasiliano in July, despite the company's position as the sole supplier of natural gas throughout Latin America's largest country. The federal oil company holds stakes in all of the state-owned natural gas distributors, including a 100% stake in Espirito Santo state distributor BR Petrobras Distribuidora S/A. All but two of the states are served by a single distributor.

Gas distributors in Brazil also do not directly compete with each other, instead operating in specific regions on 30-year concession contracts that can be extended.

Sao Paulo and Rio de Janeiro, the country's two most-populous states, are served by multiple, publicly held distributors. In addition to Gas Brasiliano, Sao Paulo is divided between Spanish gas company Gas Natural SDG SA's (GAS.MC, GASNF) gasNatural Sao Paulo Sul and Comgas (CGAS5.BR). Spain's Repsol YPF SA (REP.MC, REPYY) holds a stake in Gas Natural, while Comgas is controlled by BG Group PLC (BG.LN, BRGYY).

Rio de Janeiro state is divided between CEG and CEG Rio, both also controlled by Spain's Gas Natural.

-By Jeff Fick, Dow Jones Newswires; 55-21-2586-6085; jeff.fick@dowjones.com

--Paulo Winterstein in Sao Paulo contributed to this report

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