BP buys into offshore Brazil with $7bn Devon Energy deal

Acquisition includes assets in Brazil, Azerbaijan and the Gulf of Mexico

BP is finally joining the rush for Brazil's deepwater oil reserves with a $7bn (£4.7bn) deal with Devon Energy to buy assets in Brazil, Azerbaijan and the Gulf of Mexico.

Although the deal only gives BP up to 40, 000 barrels per day of actual production, it provides the company its first foothold in the spectacularly promising but technically challenging areas off the Brazilian coast.

Under the terms agreed with Devon, BP will also sell the Oklahoma-based company a 50 per cent stake in its Kirby oil sands project in Canada for $500m.

Tony Hayward, the BP chief executive, said: "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."

In Brazil, BP gains an interest in eight licence blocks in the Campos and Camamu-Almada basins off the East coast. The Campos blocks include three existing discoveries made by Devon – called Xerelete, Wahoo and Itaipu – with an estimated 500 million barrels of resources between them, as well as the Polvo field, which is already in production. BP will also gain two onshore licences in the Panaiba basin.

The Gulf of Mexico licences are also a good fit for BP, focusing on the ultra-deep Paleogene layer lying in a 300-mile swath across the seabed in rocks laid down as much as 65 million years ago. BP is already the largest producer in the Gulf of Mexico, pumping out more than 400,000 barrels of oil and gas per day. And it is the largest leaseholder of tricky ultra-deepwater areas, including Kaskida and last September's "giant" discovery at nearby Tiber.

Alongside some 240 ultra-deepwater leases and four producing oil fields at Zia, Magnolia, Merganser and Nansen, yesterday's Devon deal hands over the US group's 30 per cent interest in Kaskida, giving BP 100 per cent ownership of the 3 billion barrel field.

BP's experience in the Gulf of Mexico will be critical to its success in Brazil. Lessons learnt from the problematic Thunder Horse field, which took three years longer than expected to bring on stream, have yielded significant expertise, and it has developed state-of-the-art technology for dealing with the salt layers that bedevil traditional seismic imaging techniques.

But Brazil is still a major challenge. In total, the offshore oil fields are estimated to hold at least 80 billion barrels of oil and gas, and international majors have flocked to the region in recent years. BG Group, Shell, Galp, Repsol and ExxonMobil all already have positions in the region, in partnership with Brazil's Petrobras.

The Santos Basin in particular, just to the south of Campos, has yielded an unprecedented run of drilling successes in recent years. But the technical challenges of both the water and the salt layers in the rock put the region at the cutting edge of what is technically possible, and commercial production is only just beginning.

The biggest risk of all is political, as the Brazilian government strives to secure as much of the benefits as possible from its newly discovered glut of resources.

The tie-up in Canada is less of a priority for BP. The group has only a single, undeveloped interest in controversial tar sands resources, under a joint venture with Husky Energy put together in 2007, which faces its final investment decision towards the end of this year. But the involvement of Devon – which is selling out of far-flung assets such as Brazil specifically to concentrate on its core North American portfolio – will help to speed progress. Andy Inglis, BP's head of exploration and production, said: "Devon is an experienced operator in the Canadian oil sands, with a proven track record, and we expect this transaction will accelerate the development of the Kirby assets."

In Azerbaijan, the deal will raise BP's interest in the Azeri-Chirag-Guneshli (ACG) development to just shy of 40 per cent.

In deep water: The new oil rush

*Drilling for hydrocarbons in deepwater regions such as offshore Brazil and the Gulf of Mexico come with massive technical challenges.

*First there is the sea. The Campos and Camamu-Almada basins are filled more than 2,500 metres deep with inhospitable Atlantic Ocean. Then there is the rock, which may be more than a kilometre thick. But they are as nothing compared with the salt, which can lie up to 2 kilometres thick, blocking seismic imaging techniques so vital to modern hydrocarbon prospecting and complicating extraction.

*Once found, deepwater and so-called "sub salt" oil reserves are then enormously difficult to get out. The Tiber Prospect discovered by BP in the Gulf of Mexico last year, for example, is expected to hold up to 3 billion barrels of oil and gas. But as little as 20 per cent of it is expected to be extractable.

*The Tiber well is one of the world's deepest ever, drilled 11,000 metres into the seabed through 1,000 metres of water – as far below the earth's surface as a passenger jet flies above it.

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