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BP Pays $7 Billion for Offshore Assets


MARCH 11, 2010


BP PLC’s $7 billion deal with Devon Energy Corp should help dispel some of the misgivings that have weighed on the British oil major’s stock in recent years—particularly doubts about its ability to keep pumping more and more oil.

The deal gives BP a foothold in the deep waters off the shores of Brazil, one of the world’s most prospective oil regions, and one that could turn into a major source of growth for the company in coming years.

BP announced Thursday it would pay Devon $7 billion in cash for its assets in Brazil, Azerbaijan and the deepwater part of the Gulf of Mexico. It also will sell Devon a 50% stake in its Kirby oil-sands interests in Alberta, Canada, for $500 million. The two will form a joint venture to develop the property.

Oklahoma City-based Devon had announced plans last November to divest all its international and offshore assets so it could concentrate on its onshore oil and gas projects in North America.

Andy Inglis, BP’s head of exploration and production, said the deal “further underlines our global position as the leading deepwater international oil company.”

Analysts struggled to ascertain how big the reserves are that BP is buying and whether it was overpaying for them. That’s because a lot of the assets include fields that are still being explored and whose reserves are unknown.

But the acquisition addresses one of the critical issues facing BP and its rivals: how do you grow when you’re already so big? Supermajors like BP and Exxon Mobil Corp, which each pump several million barrels of oil a day, struggle to make discoveries large enough to move the needle in terms of their output and reserves. Often they have fallen back on share buybacks and high dividends to appease shareholders disappointed by low volume growth.

BP, in particular, has had trouble convincing investors that it can continue to expand. The company says it will increase production by between one and two percent until 2015, but investors have been skeptical that it can keep up the momentum beyond that.

Entering Brazil should help BP reassure skeptics about its future. Jason Kenney, an oil analyst at ING Bank, said the deal would increase BP’s current production by only about 40,000 barrels of oil a day—about 1%—but that could rise to 100,000 barrels a day by 2015-2016.

“It adds to confidence that they can maintain growth in the post-2015 period,” said Ivor Pether, a fund manager of Royal London Asset Management, which owns £425 million ($636 million) in BP stock.


Suzanne Plunkett/ReutersBP Chief Executive Tony Hayward

There was a note of caution in some analysts’ assessments of the Devon deal. BP will acquire interests in 10 exploration blocks in Brazil, including seven in the Campos Basin, where more than 85% of Brazil’s crude oil is produced. The blocks include three discoveries, Xerelete, Wahoo and Itaipu, and a producing field, Polvo.

Yet the properties are far from the Santos Basin, where oil has been found in enormous quantities in recent years under a thick layer of salt. Among the so-called subsalt discoveries, the biggest is Tupi, which is estimated to contain between five and eight billion barrels of oil. It is the Santos Basin that has inspired great excitement in the global oil industry and it’s the place all the majors want to be. But some industry observers think the subsalt areas of the Campos Basin, which are still largely unexplored, could hold similar potential.

As well as Brazil, BP will be acquiring equity in 240 leases in the U.S. Gulf of Mexico, many of them in an area of deep water called the Paleogene. BP, which already is the largest producer in the Gulf with more than 400,000 barrels a day of output, has made two huge finds there in recent years, Kaskida and Tiber. Under Thursday’s deal, BP will acquire Devon’s 30% interest in Kaskida, raising its stake in the prospect to 100%.

The deal will also increase BP’s stake in the massive Azeri-Chirag-Gunashli field in Azerbaijan, which it already operates, to 39.77%.

Meanwhile, teaming up with Devon will unlock the potential of BP’s Kirby oil-sands assets in Canada, which have lain dormant in BP’s portfolio for years. The development will provide a useful source of oil for BP’s Whiting refinery in Indiana, which is being upgraded to process heavy crudes from Canada.

Deutsche and J.P. Morgan advised Devon on the deal with BP, which didn’t use an outside adviser.

Write to Guy Chazan at [email protected]


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