Gulf Oil Spill Puts BP's Deepwater Brazilian Dreams At Risk

http://industry.bnet.com/energy/10004936/gulf-oil-spill-puts-bps-deepwater-brazilian-dreams-at-risk/

The Gulf of Mexico isn’t the only deepwater prospect that BP had its eyes on in those pre-oil spill days. Just five weeks before the Deepwater Horizon rig exploded and oil began gushing from BP’s well, the company announced a $7 billion all-cash deal to buy Devon Energy’s (DVN) offshore assets, including deepwater oil fields in Brazil — an area CEO Tony Hayward has coveted for some time. The acquisition — which promised to catapult BP past its rivals — has now been delayed while the Brazilian government reviews the deal and tries to gauge BP’s ability to honor contracts.

The Brazilian government said this is all part of the country’s normal review process of takeovers. But this deal isn’t like all the others. It would mark BP’s entrance into the offshore Brazilian oil fields at a time when the company is consumed with the Gulf spill, the worst environmental disaster in U.S. history. Brazil has two pressing questions to consider:

* BP’s ability to safely explore for oil and gas in some of the deepest and most technically difficult areas in the world;
* BP’s financial capabilities now that the company has agreed to set up a $20 billion escrow account to pay for damages from the spill. BP has canceled its dividend for the remainder of 2010 and will sell $10 billion in non-core assets to fund the account. The escrow account is just the beginning. It’s possible that damages and the cost of clean up will be even bigger.

The Devon-BP deal also included interest in some 240 leases in the Gulf of Mexico, with a focus on the emerging Paleogene play in the ultra-deepwater; and has BP taking over two of Devon’s deepwater drilling contracts valued at $1.1 billion. Devon has completed the sale of all of its Gulf of Mexico assets, leaving just the Brazilian oil fields and a controlling interest in a Caspian Sea project still in play.

The risk is greatest for BP, which desperately wants access to Brazil’s offshore oil fields. Devon, meanwhile, is sitting pretty. Brazil’s offshore assets are highly sought after, and even more so now, as oil companies worried about stricter regulation in the deepwater of the Gulf of Mexico look elsewhere.