BP's Brazilian Foray Continues


BP Plc (BP) has won the Brazilian National Petroleum Agency (:ANP) permit for the exploration of hydrocarbon off the coast of Brazil's equatorial margin, along with the Brazilian state-owned company Petroleo Brasileiro S.A. (Petrobras or PBR). The approval will aid BP in enhancing its footprint in the country’s offshore play.

Per the pact, the U.K. super major will gain 40% share from Petrobras in each of the four exploration blocks, located in the Barreirinhas and Ceará basins. Four blocks––BM-BAR-3 and BM-BAR-5 in the Barreirinhas basin, and BM-CE-1 and BM-CE-2 in the Ceará basin––comprise a total area of 2,113 square kilometers. However, the parties did not disclosed financial terms of the transaction.

Upon completion of the deal, BP will be able to gain interests in 14 blocks in Brazil with operational control over six. Of the total, the company will be in partnership with Petrobas in nine blocks, namely the Xerelete field, BM-C-34 and BM-C-35 (in the Campos basin); BT-PN-2 and BT-PN-3 (in the Parnaíba basin); BM-BAR-3 and BM-BAR-5 (in the Barreirinhas basin), and BM-CE-1 and BM-CE-2 (in Ceará basin).

A number of hydrocarbon discoveries in the last decade have led to a near 70% rise in the South American country's proven oil and gas reserves. In 2011, BP acquired nine licenses from Devon Energy Corp. (DVN) for exploration activities in the Campos Basin, for a total consideration of $3.2 billion.

In the fourth quarter of 2011, BP’s total production fell 5% year over year to 3.5 million barrels of oil equivalent per day (MMBoe/d). The Upstream segment also experienced a 5.6% year-over-year decrease in profit. Hence, we believe the company’s focus on a string of upstream activities in high margin areas like the Gulf of Mexico (GoM), Angola, the North Sea, Brazil, Australia and India bodes well for its future growth.

Recently, BPand Plaintiffs’ Steering Committee reached an agreement of $7.8 billion, over the reimbursements to be made for the 2010 GoM oil spill. The settlement will help BP to resolve issues with the federal and state governments and move beyond the catastrophic incident that adversely affected the company’s role as the world's largest offshore operator.

However, we maintain our Neutral recommendation as BP faces headwinds from a number of global macro issues, which include sovereign debt risks, defaults on sovereign credits, and changes in U.S. monetary, fiscal and tax policies.

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