Tags: BP, Brazil, Brazilian Economy, Devon Energy, Exxon, Oil, Petroleo Brasileiro, Royal Dutch Shell

BP Dives Into Brazil's Offshore Oil Industry With $7 Billion Deal

By , Associate Editor, Money Morning •

British oil giant BP PLC (NYSE: BP) has finally entered Brazil's vaunted deepwater oil market with a $7 billion purchase of Devon Energy Corporation (NYSE: DVN) assets.

BP yesterday (Thursday) announced it would acquire some of Devon's interests in Brazil, Azerbaijan and the Gulf of Mexico. BP also agreed to sell Devon a 50% stake in its Kirby oil sands interest in Alberta, Canada, for $500 million, forming a joint development venture.

The deal bolsters BP's oil industry position by giving it access to deepwater oil fields that have the potential of yielding billions of barrels of oil.

BP will gain 10 exploration blocks in Brazil, 240 leases in the Gulf of Mexico, and an additional 5.63% stake of the Azeri-Chirag-Gunashli oil field making its total Azeri stake 39.77%. BP will have complete control over the Kaskida field in the Gulf of Mexico, which analysts estimate could be worth $6 billion.

The fields will start significantly contributing to production in 2015 and will help BP meet its annual production growth goal of 1-2%.

"Through our entry into Brazil, BP will add a major position in another attractive deep-water basin. Together with the additional new access in the Gulf of Mexico, it further underlines our global position as the leading deep-water international oil company," said Andy Iglis, head of BP's exploration and production arm.

BP has been eyeing the Brazilian deepwater oil fields as it strives to remain one of the leading international oil companies. Brazil has been the most talked-about, sought-after and prolific area for oil exploration in recent years, so it makes strategic sense for BP to want a stake in it. Other big oil players who have joined with state-run Petroleo Brasileiro SA (NYSE ADR: PBR) to explore deepwater oil fields are Exxon Mobil Corp. (NYSE: XOM) and Royal Dutch Shell PLC (NYSE ADR: RDS.A).

The region's potential has been compared to the North Sea, where BP explored deepwater reserves in the 1960s and 1970s, but which is now mostly depleted.

Brazil's deepwater fields are technologically difficult to explore because the oil is thousands of meters below sea level, under a thick layer of rock and salt.

BP is acquiring offshore interests in the Campos and Camamu-Almada basins, north of Rio de Janeiro. The discoveries there have not yet been as impressive as those in the popular Santos Basin, but have similar geological features and fields waiting to be explored.

Due to most of the purchased assets being unexplored, the deal did not include an estimate as to how much oil BP would have, but analysts estimated booked reserves to be 140-160 million barrels of oil equivalent (boe); ING estimated recovered reserves could reach more than 800 million barrels.

Devon announced in November it wanted to sell its international assets - aiming to get $4.5 to $7.5 billion for them - and focus on strengthening its North American onshore business. Analysts see the move as positive for both companies.

"Whilst the deal comes at the top end of the values speculated in the press recently, the acquisition is a key strategic move for BP," said Merrill Lynch in a note to clients. "All-in-all we see the Devon deal... offering significant exploration upside over the longer term."

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