BP strikes $7bn Brazil oil deal

BP on Thursday confirmed it was to enter the deep waters off the coast of Brazil, one of the world’s most exciting areas for oil exploration, with a $7bn (£4.7bn) deal to buy international oil and gas assets from Devon Energy.

Under the terms of the deal, BP will also expand its operations in the Gulf of Mexico, where it is already the largest producer of oil and gas, and increase its interests in Azerbaijan.

In addition, the UK oil and gas exploration company will receive a $500m payment to create a joint venture with Devon Energy to exploit oil sand interests in Alberta, Canada.

The deep fields off the Brazilian coast are estimated to hold at least 80bn barrels of oil. Industry executives think the region could be as important as the North Sea. Already one of the top 10 oil suppliers to the US, Brazil is set to become an increasingly important exporter.

Several western companies have formed partnerships with Petrobras, the Brazilian national oil company, to explore and develop fields in the region. These include ExxonMobil of the US, BG of the UK, Galp of Portugal, Repsol of Spain and Royal Dutch Shell, which is based in the Netherlands.

The deal with Devon, an Oklahoma-based US company which has six licence blocks in partnership with Petrobras to explore Brazil’s “most promising offshore areas”, provides BP with a faster and more direct route into the country.

“This strategic opportunity fits well with BP’s operating strengths and key interests around the world, offering us significant additional long-term growth potential with an emphasis on high-margin oil,” said Tony Hayward, BP’s chief executive, in a statement.

While Brazil offers great promise, industry executives and analysts say challenges need to be overcome before the country can realise its potential as an oil and gas exporter.

The deep-water oil reservoirs, which are 7,000 metres below sea level and under a thick layer of salt, are technically difficult to develop. There has also been widespread concern that the government’s ambition to maximise Brazil’s income from its oil wealth could create problems for foreign investors.

The Devon deal also strengthens BP’s position in the Gulf of Mexico, a region that it sees as very important strategically. With discoveries such as the Tiber field last year, BP is opening up new reserves six miles below the sea bed in the deep waters of the Gulf. It is already a partner of Devon in the Kaskida field, a large deep-water discovery in the area made in 2006.

Statoil of Norway is also taking a keen interest in the deep-water reserves of the Gulf, buying Devon’s stake in the St Malo project.

Andy Inglis, chief executive of exploration and production at BP, said: “Through our entry into Brazil, BP will add a major position in another attractive deepwater basin. Together with the additional new access in the Gulf of Mexico, it further underlines our global position as the leading deepwater international oil company.”

Devon, one of the biggest US independents, last year said it would sell its Gulf of Mexico and international assets to generate up to $7.5bn towards focusing fully on high-return US and Canadian onshore assets and to retire debt.

That announcement underlined the success of the US onshore natural gas business in recent years, which has been led by the independents – US companies that produce oil and gas but have no refining business.

Devon holds a leading position in the Barnett Shale – the biggest producing gas field in the US, as well as other shale fields across the country.

The company had said it did not believe some of its assets, particularly those in the Gulf and internationally, were being properly valued.

Shares in BP opened 0.5 per cent lower at 621 p on Thursday.