BUSINESS
MARCH 10, 2010.

Offshore Brazil Beckons for BP

British Firm Nears Deal for Up to $6 Billion in Western Hemisphere Oil Assets.

By GUY CHAZAN And JEFFREY MCCRACKEN

British oil giant BP PLC is set to acquire a big swath of oil assets from U.S. independent oil and gas producer Devon Energy Corp. The deal, worth up to $6 billion, would vault BP into the hot new oil region off the shores of Brazil, people familiar with the matter said.

The deal would also reinforce BP's dominant position in the Gulf of Mexico and give it a stake in Devon's operations in Canada. It is expected to be announced as early as Thursday, said people familiar with the matter.

Devon, a midsized company, doesn't have the financial muscle to develop all its many assets and has decided to concentrate on its onshore projects in North America.

The transaction could fall through in its final stages, as Oklahoma City-based Devon and its advisers are considering a number of options for the sale of the assets, said these people. Other suitors, including China National Offshore Oil Corp., known as Cnooc, and major Western oil companies like Chevron Corp., are also still in the mix, though they are less likely to win the assets than BP, said one of these people.

Bids for the Gulf of Mexico assets came back in the last week, leading some to suspect BP threw out a big price to win the process, said people familiar with the matter.

BP and Devon both declined to comment.

BP is already the largest producer in the Gulf of Mexico, with some 500,000 barrels of daily production capacity. Last year it found a giant oil field there, Tiber, after drilling the world's deepest discovery well at over 35,000 feet, or about 10,700 meters.

But the British-based super-major so far has no exposure to offshore Brazil, which has yielded some of the largest oil discoveries of recent decades. Those include the huge Tupi field that is estimated to hold recoverable reserves of between five billion and eight billion barrels of oil and is the biggest oil find in the Western hemisphere since 1976.

Brazil's so-called subsalt oil lies in deep water under thousands of feet of sand, rock and a shifting layer of salt. The area has been difficult for major oil companies to access, and so far, the biggest prospects are largely being developed by Brazil's Petroleo Brasileiro SA, or Petrobras, and smaller Western companies like Britain's BG Group PLC and Repsol-YPF SA of Spain.

BP's chief executive, Tony Hayward, has frequently indicated that the company would like to enter Brazil, where it can leverage its expertise as one of the world's leading deepwater operators.

BP's interest in Brazil shows how the majors are increasingly looking to deepwater for growth as they face mounting challenges winning access to other, easier-to-develop oil reserves in places like the Middle East.

Devon is one of the biggest U.S. independents—companies that produce oil and gas but don't have refining or marketing businesses. The company pioneered the development of the Barnett Shale, the Texas gas field that set off a natural-gas drilling boom in recent years, and has also been involved in other big new gas fields. Last November, Devon said it planned to sell all its offshore and international assets in order to focus on its onshore North American energy business. It said it expected to generate after-tax proceeds of up to $7.5 billion from the divestitures.

Offshore projects have proven difficult for smaller companies like Devon, not only because of their high cost but also because they take years to start generating revenue. Devon said in November that its offshore projects were leaving it without enough cash to put into cheaper, quicker onshore developments. These assets "require a lot of capital, which Devon has decided it wants to use elsewhere," said a person familiar with the matter. Devon sold its African assets in 2007 and 2009.

That problem doesn't face giants like Exxon Mobil Corp. or BP whose balance sheets are so strong they can wait years before the first oil from their projects starts to flow.

In December, A.P. Moller-Maersk, the Danish shipping and oil group, bought Devon's stake in the Jack oil field in the Gulf of Mexico for $300 million. Maersk had originally intended to buy Devon's stakes in two other deepwater fields as well—St. Malo and Cascade. But the deal unraveled when Devon's partners exercised pre-emptive rights to buy the stakes. Cascade is operated by Petrobras and Jack and St. Malo by Chevron.

Devon will sell to BP its interests in the Gulf of Mexico, offshore Brazil and a stake in its Canadian energy business, according to a person familiar with the matter. Devon produces bothconventional and heavy oil in Canada, and also has shale-gas properties in the Horn River Basin of northeast British Columbia.

BP has been upgrading its Whiting, Indiana, refinery so it can process heavy oil from Canada. Analysts say BP has long been on the hunt for Canadian oil sands properties to feed Whiting, and Devon's properties would be a good strategic fit.

It was unclear whether a deal with BP would include Devon's other international assets, such as its offshore oil fields and exploration blocks in China and its 5.6% interest in a huge oil field in the Azerbaijani sector of the Caspian Sea, Azeri-Chirag-Gunashli. BP has a 34.1% stake in the consortium operating ACG, and industry observers said it was unlikely that the Azeri government would allow BP to expand its interest any further.

Chinese bidders, like Cnooc, and some Indian companies like ONGC Videsh Ltd., known as OVL, are most interested in the Azerbaijani assets, according to people familiar with the talks.

—Ben Casselman contributed to this article.
Write to Guy Chazan at guy.chazan@wsj.com and Jeff McCracken at jeff.mccracken@dowjones.com

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