IHS Global Insight Perspective | |
Significance | The US$1.9-billion cash deal will give Ecopetrol and Talisman BP's interests in five producing fields in four association contracts, two offshore exploration contracts, and various pipeline assets in Colombia. |
Implications | The transaction adds an estimated 60 million boe in reserves to Ecopetrol and Talisman's portfolios, as well as around 25,000 boe/d in net production. For BP the sale will allow it to dispose of its interests in contracts that had been due to expire within the next 10 years and are no longer such important contributors to its global production, as well as to raise additional funds to cover its liabilities related to the U.S. Gulf Coast spill. |
Outlook | Despite BP's departure, more than 70 foreign companies remain present in Colombia's oil sector including a large number of junior oil companies from Canada as well as larger established players such as Chevron, Total, Occidental Corp., and Petrobras. |
The U.K. supermajor BP has released a statement announcing that it has reached an agreement to sell its assets in Colombia to the state oil company Ecopetrol and Canada's Talisman Energy for US$1.9 billion in cash, subject to customary post-completion price adjustments. Following completion of the sale Ecopetrol will take a 51% stake in BP's wholly owned subsidiary, BP Exploration Company (Colombia) Limited (BPXC), and Talisman the remaining 49%. BP expects the sale to be completed by the end of the year, subject to regulatory approval. According to the company’s statement, the upstream assets have an estimated 60 million boe net proved reserves. Talisman's statement, however, cites a figure of 98 million boe of proved and probable (2P) reserves and 75 million boe proved reserves, net of royalties, while Ecopetrol puts the volume of 2P reserves at 94 million boe.
BPXC's main assets comprise interests in four association contracts: the Tauramena (31%) and Rio Chitamena (31%) contracts, where the Cusiana field is located; the Recetor contract (50%) and the Piedemonte contract (50%), which includes the Pauto Sur and Floreña producing fields. It also has interests in two offshore exploration blocks awarded in the Ronda Caribe 2007 licensing round: CR4, in partnership with Petrobras and Ecopetrol, and Block CR5 on its own. Additionally, BP's local subsidiary has stakes in the Ocensa (24.8%), Oleoducto de Colombia (14.57%), and Oleoducto del Alto Magdalena (4.25) oil pipelines and in the Transgas de Occidente, a gas pipeline in western Colombia. The sale also includes BP's interest in the Cusiana gas processing facility. BP did say, however, that it will retain its lubricants business and other downstream oil activities in Colombia.
The fit makes sense as Ecopetrol already partners BP in its association contracts and has stakes in the oil pipelines included in the deal. Meanwhile, Talisman is well established in Colombia, where it participates in 14 blocks including the Niscota Block, where a significant discovery was made at the Huron well. It also has previous experience of partnering Ecopetrol in several blocks in Colombia and Peru. In its press release on the sale Talisman said that the acquisition will provide over 12,000 boe/d of production net to the company and its completion "will accelerate [its] objective of building a material core area in Latin America, with target production of at least 50,000 boe/d."
The announcement of the deal will not have come as a surprise, as the Colombian press had previously reported that BP had hired Barclays Capital to handle the sale. Nonetheless, BP's exit from Colombia's upstream sector marks the end of an era. Not only has the U.K. company had a presence in the country since 1987, but the fields with which it is most closely associated, Cupiagua and Cusiana, were formerly the country's largest producing fields. Their combined output peaked at 434,000 b/d in 1999, but output has been falling as a result of natural decline and in 2009 their combined output stood at just 57,757 b/d. In order to extend their productive lives investments are now being made to boost gas production at these fields.
Outlook and Implications
The sale announced yesterday is part of a broader investment programme announced by BP aimed at raising US$30 billlion over the next 18 months in order to fund its oil spill response effort in the U.S. Gulf of Mexico (see United States: 27 July 2010: BP Takes Major Losses Through Q2; Liquidity the Focus As Divestment Target Raised to US$30 Bil.). The Colombian sale follows the reaching of a deal with Apache Corp. that will see the U.S. independent pay US$7 billion in cash to BP to buy a variety of oil and gas assets in the United States, Canada, and Egypt, meaning that BP is now already almost a third of the way toward reaching its final target (see United States: 21 July 2010: Apache Strikes US$7-Bil. Deal to Buy BP Assets in U.S., Canada, and Egypt). Further sales are in the pipeline, with the company reaffirming its intention to divest its upstream assets in Pakistan and Vietnam in the statement announcing the Colombian sale (see World - Pakistan - Vietnam: 21 July 2010: BP to Shed Assets in Pakistan and Vietnam As Divestment Plan Gets Under Way). There have also been unconfirmed reports of further divestments planned in the Americas, namely the possible sale of BP's assets in Venezuela and its 60% holding in Pan-American Energy, Argentina's second-largest oil producer (see Venezuela: 30 July 2010: BP Could Reportedly Sell Assets in Venezuela to Russian Partner and China: 2 July 2010: BP Reportedly Looking to Sell Assets in Argentina). However, crucially, there have been no suggestions that it is looking to pull out of a deal announced earlier this year to acquire part of Devon Energy's offshore assets in the U.S. Gulf of Mexico and Brazil or to slim down its presence in Trinidad and Tobago, where BP is a major gas producer as well as a participant in the Atlantic LNG plant (see Brazil: 11 March 2010: BP Acquires Devon's Assets in Gulf of Mexico, Brazil). The company has also in recent weeks reaffirmed its commitment to the U.S. market, where it had several new deepwater production projects in the pipeline prior to the Macondo spill. Instead BP is trimming its operations around the world, but appears determined to extract maximum value out of its remaining portfolio by focusing on those areas where it has particular expertise or where it sees stronger growth potential. This is in line with a strategic plan unveiled prior to the spill under which BP said that it intended to focus its efforts on three key areas in which it characterises itself as having a "deep expertise", namely deepwater production, unconventional gas, and giant fields (see World-United States: 3 March 2010: BP Talks Strategy for 2010 and Beyond).
In this context BP's decision to exit Colombia's upstream sector makes perfect sense. Not only has output from its largest producing field, Cusiana, declined significantly in recent years but the government's refusal to extend its contract for this field mean that it will have to hand it over to Ecopetrol in 2016 anyway, just as it did recently with the Cupiagua field when the Atalayas Association Contract expired (see Colombia: 2 July 2010: BP Hands Cupiagua Field to Colombian State Oil Company). Its other association contracts had all been due to expire by 2020. Meanwhile, offshore exploration in the Caribbean Basin has yet to live up to its promise with a report published in Upstream last month indicating that two other foreign companies, ExxonMobil and BHP Billiton, are also looking to pull out of this area.
Moreover, even if BP were to stay and look for other business opportunities, most of the recent discoveries in Colombia have been much smaller than the large finds made in the 1980s and 1990s, which means that unless it is willing to take on considerable exploration risks the prospects of BP making similar returns on another project to those made on the Cupiagua and Cusiana fields over a relatively long period of time are relatively slim. This is not to say that Colombia's oil sector does not have its attractions or that BP's sale of its upstream assets in the country should be interpreted as a slight. Indeed, the sector is currently undergoing an investment boom and continues to attract new entrants and output has risen rapidly in recent years, expected to reach 1 million b/d by 2015 or earlier, according to the government's projections. Instead, BP's exit is merely a reflection of the fact that this production growth is now coming from other companies' operations, as well as perhaps an indication that BP no longer considers the additional investments needed to extend the life of its mature fields worthwhile when it could be focusing its energies on larger projects elsewhere in the world with stronger long-term production potential.