BP Is On A Shopping Spree To Expand Its Operations
The oil and gas industry has witnessed numerous ups and downs in the year 2016. While a few oil and gas companies had to file for bankruptcy during the year, some of the large integrated energy companies saw a severe decline in their profitability due to plummeting commodity prices. However, the year ended with a positive news of the Organization of Petroleum Exporting Countries (OPEC) reaching an agreement to cap their cumulative oil production at 32.5 million barrels per day (Mbpd). Even though the recovery trajectory remains uncertain, the outlook for the forthcoming quarters appears much more optimistic now. Consequently, BP Plc. (NYSE:BP), an integrated energy company, that had a tough year due to the weakness in commodity prices, rebounded well in the latter half of the year, backed by the anticipated recovery in commodity markets. The company’s stock price that touched multi-year lows of $27 per share in first quarter when the commodity markets crashed, revived by more than 20% year-to-date.
Source: Google Finance; US Energy Information Administration (EIA)
The recovery in commodity prices, coupled with the final estimation of the claims arising from the 2010 Deepwater Horizon Oil Spill, has enabled the London-based company to direct all its execution capabilities and financial resources towards enhancing its future growth prospects. BP is now giving higher priority to large investments aimed at increasing production. In line with this strategy, the company has made a few significant deals across different countries over the last few weeks, with an aim to expand its operations.
10% Interest In Abu Dhabi Onshore Oil Concession
Earlier this month, BP signed an agreement with the Supreme Petroleum Council of the Emirate of Abu Dhabi and the Abu Dhabi National Oil Company (ADNOC) for a 10% stake in Abu Dhabi’s ADCO onshore oil concession. The ADCO concession, which includes the Bab, Bu Hasa, Shah, and Asab fields, has a total resource base of 20-30 billion barrels of oil equivalent (Bnboe) and a life of 40 years. The concession was put in place in January 2015, and is expected to have an average production of around 1.66 Mbpd by the end of 2016 [1].
In addition to the interest in the ADCO concession, BP will also become a 10% shareholder in ADCO, the Abu Dhabi Company for Onshore Petroleum Operations Limited, which operates the concession. For this, the company will issue new ordinary shares representing approximately 2% of its issued share capital or approximately $2.2 billion, to be held on behalf of the Abu Dhabi Government. BP has been operating in Abu Dhabi since 1939 and has previously held a 9.5% interest in the ADCO onshore concession that expired in late 2014. But due to the softness in the commodity markets, the agreement was not renewed. Apart from this, BP currently holds a 14.67% interest in the offshore concession and ADMA-OPCO which operates the concession, and 10% interests in both the Abu Dhabi Gas Liquefaction Company (ADGAS) and the National Gas Shipping Company (NGSCO).
At present, BP’s net share of oil and gas production from Abu Dhabi is around 95,000 barrels of oil a day (boed). However, post the deal, this number is expected to increase to roughly 260,000 boed in 2017. Given its advanced technology and experience in managing mature fields, the oil and gas player will be able to maximize the recovery from these assets and drive a higher value for itself and all the parties involved in the deal.
Working Interest In Kosmos Energy’s Mauritania And Senegal Assets
Within a couple of days of announcing the Abu Dhabi deal, BP declared its agreements with Kosmos Energy (NYSE:KOS) to acquire a 62% working interest, including operating rights of Kosmos’ exploration blocks in Mauritania, and a 32.49% effective working interest in Kosmos’ Senegal exploration blocks. The deal entails acquisition of roughly 33,000 square kms of acreage, which is estimated to hold 50 trillion cubic feet (tcf) of gas resource potential and in excess of 1 billion barrels of liquids resource potential((BP agrees deal with Kosmos Energy to partner on world-class discoveries in Mauritania and Senegal, 19th December 2016, www.bp.com)).
Under the terms of the agreements, BP will pay Kosmos a cash bonus of $162 million on completion of the deal, followed by Kosmos’ exploration and appraisal costs of $221 million and development costs of $533 million. Further, Kosmos will continue to be the exploration operator at the deep water blocks and would retain 32.51% and 28% in the blocks off Senegal and Mauritania, respectively. Yet, Kosmos will receive a contingent bonus of up to $2 per barrel for up to 1 billion barrels of liquids, as a production royalty, subject to a future liquids discovery and oil price.
With the successful completion of the transaction, BP will also gain strategic access to an emerging world-class deepwater gas discoveries, which will augment the company’s plan to expand its presence in the LNG market. Earlier this year, Royal Dutch Shell (NYSE:RDS.A) had completed its acquisition of the BG Group, which was also targeted at increasing the former’s presence in the LNG market (Read: How Significant Is Shell’s Footprint In The LNG Market?). Thus, the sudden rise in the deal centered around the LNG markets reiterates the importance of the growth potential of these markets. It also indicates that BP’s plans to enter the LNG market, not only to take advantage of the huge growth prospects but also to compete with its close rivals in this space.
10% Interest In Egypt’s Zohr Gas Fields
Apart from the above two deals, last month, BP had announced a deal to buy a 10% interest in the Shorouk concession offshore Egypt from Eni for a sum of $375 million. The company will have an option to buy a further 5% interest in the concession under the same terms before the end of 2017 [2]. The concession includes the super-giant Zohr gas field, which is estimated to hold total gas resources of approximately 30 tcf of gas. The first phase of development of Zohr is on track with first gas currently expected in late 2017, coinciding with the closure of the deal. On completion of the transaction, BP is expected to reimburse Eni for 10% of the past expenditures on the concession.
BP has been operating in Egypt for over 50 years and is considered to be one of the largest foreign investors in the country with a total investment of $30 billion. Thus, this deal will further strengthen and expand the company’s operations in the country and leverage some of the world-class resources in a strong price environment to deliver higher value to its shareholders.
The series of high value acquisitions announced by BP over the last couple of months highlights that the company has come a long way since the oil spill disaster and is now concentrating on growing its operations by investing in high potential and high return markets. Given that the outlook for commodity markets has improved drastically, these deals could prove to be a huge positive for the company, if the company is able to effectively deliver on its plans. However, the upside will be restricted to be the pace of recovery in commodity prices.
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Notes:- BP awarded 10% interest in Abu Dhabi’s ADCO onshore concession, 17th December 2016, www.bp.com [↩]
- BP buys 10% interest in Egypt’s super-gaint Zohr gas field, 25th November 2016, www.bp.com [↩]