Why BP is betting billions that God is Brazilian

“God is Brazilian,” was the patriotic declaration of the country’s president, after the true potential of the South American nation’s oil wealth began to emerge in 2007.

Since he uttered this effusive thanks for Brazil’s good hydrocarbon fortune, the oil majors have been jostling with its national company Petrobras for a slither of the excitement.

The country’s largest fields are bursting with up to 13bn proven barrels of the black stuff, but it is the unproven potential of the Campos and Santos basins offshore that mean Brazil’s abundance of oil could approach that of Russia and Saudi Arabia

It is therefore no surprise that BP’s chief executive, Tony Hayward, has chosen the Campos basin for his biggest acquisition since taking the helm almost three years ago.

He dropped a couple of hints last month to investors when suggesting that BP thought the Brazilian market opportunities were “plentiful” and that his interest lay in acquiring assets rather than entire companies.

Focus at that point was on whether the super-major would pick up some fields from Repsol or even make a play for British explorer BG Group, which has a lucrative interest in the giant Tupi field.

But the choice of Devon Energy’s assets was hailed by analysts as a good strategic move, if an expensive one, despite a muted reaction from the market with BP’s share price unchanged.

“There’s no doubt it’s absolutely key in terms of getting a foot in the door in Brazil,” says Malcolm Graham-Wood, director of oil and gas broking at Westhouse Securities. “The blocks are not huge but it’s very important for BP to be part of the pack.”

It is likely that BP will be wanting to emulate its success in the Gulf of Mexico, where it is becoming an expert in very deepwater drilling.

The $7bn (£4.6bn) deal also gives BP another 240 leases in this prime area, including a 30pc stake in the Kaskida field, in which it already owns 70pc.

Adding further to its Eurasian portfolio, BP gets an increased stake in its Azerbaijan oil project and the benefit of reduced exposure to the politically-sensitive tar sands, shifting a 50pc stake and operating responsibility for its dormant Kirby field on to Devon for $500m.

However, it is the jewel of Brazil’s offshore fields – 3,000 to 5,000 metres under the ocean – that has caught City interest.

It is not quite as deep the 7,850 metres of Thunderhorse in the US bay, but still represents an achievement to reach a salt layer below the seabed with a technology that has only been pioneered within the last decade.

Digging its drills into the Brazilian pre-salt basin is likely to allay some concerns about BP’s production pipeline, which analysts have worried does not match Shell’s adventurousness.

BP is remaining tight-lipped on how much the acquisition will add to its production reserves, as it manoeuvres to maintain its narrow lead over ExxonMobil – having overtaken the world’s biggest company in output last year.

But consensus estimates put the probable uplift over the next 2-5 years range between 40,000 and 100,000 barrels of oil per day. ICAP estimated that BP has bought 140m barrels and analysts at Morgan Stanley forecast 160m, while ING guesses that recoverable reserves could eventually reach 800m.

“The deal is really about what production will be in place in seven or eight years’ time. We’re buying potential to add value. It’s very significant given that the previous biggest deal done by BP was probably the TNK-BP joint venture back in 2003,” said a BP spokesman.

A couple of City observers on Thursday voiced concerns about the price paid by the oil company, noting that BP paid towards the very top end of Devon’s $4.5-$7.5bn tag.

James Neale, an analyst at Credit Suisse, pointed out that the “price seems high at first glance”, while ICAP said the price looked “steep”.

But they note that part of the value in the Brazilian fields is their untapped nature, adding that the wisdom of the deal depends on “the value of the non-proven resources and the unlocking of value at Kirby which is not easy evaluate”.

“All in all, it’s an extremely canny move that bears all the fingerprints of Tony Hayward,” says one investment bank analyst. “It’s clever and lean – not a huge egotistical deal swallowing up a baggy company that you saw in the old BP days.”