London — BP has agreed to sell its remaining petrochemicals business to Ineos Group for $5 billion, as the oil major retools its balance sheet in a push for cleaner energy and Ineos boosts its share of the global polymer market.
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Under the deal, the UK-based petrochemical giant will acquire all of BP's petrochemicals business in Asia, the US and Europe, which last year produced 9.7 million mt of products and employed over 1,700 staff worldwide.
The sale will also include related interests, such as the chemical recycling technology BP Infinia, and BP's interest in acetylated wood developer Tricoya, BP said, but exclude BP's petchem assets in Gelsenkirchen and Mulheim, Germany, which are integrated with the refinery.
"This is another significant step as we steadily work to reinvent BP," CEO Bernard Looney said in a statement. "Strategically, the overlap with the rest of BP is limited and it would take considerable capital for us to grow these businesses. As we work to build a more focused, more integrated BP, we have other opportunities that are more aligned with our future direction. Today's agreement is another deliberate step in building a BP that can compete and succeed through the energy transition."
Ineos will boost its capacity to produce acetyls and aromatics products under the deal.
Global supply of acetic acid (AA) -- a refined substance used predominantly to make paints, adhesives and packaging -- has lengthened during the first half of 2020 as demand was hit by the pandemic. Demand from the automotive sector has been particularly affected, with car production and sales declining this year.
AA spot prices have been under pressure globally, with European values falling by 15% since the beginning of the year, according to S&P Global Platts data. In the US — a large producer of AA — spot prices have fallen by around 30% during the same period, the data shows.
BP's petchems shrink
Ineos has bought a number of businesses from BP, notably the $9 billion purchase of Innovene in 2005, a subsidiary that comprised the majority of its then chemicals assets and two refineries. BP further reduced the scale of its petchem operations when it sold its share of its Shanghai SECCO Petrochemical Company JV in China to Sinopec in 2017. As a result, BP's remaining petchem business is much smaller than peers.
In aromatics, however, BP is a global leader in the production of purified terephthalic acid (PTA) and its precursor paraxylene (PX), with production units in China, US, and Belgium. PTA is used mainly to produce polyester coatings, especially in the automotive sector.
Europe's PX industry is currently struggling. A downstream demand slump caused by COVID-19 has aggravated supply glut issues in the region, causing producers to cut production rates.
The acetyls business produces AA and derivatives, with manufacturing plants in the US, the UK, China, Korea, Taiwan and Malaysia.
In Hull, UK -- where BP's former AA unit is located -- Ineos already has petrochemicals operations and produces ethyl acetate, a downstream product for AA. Ineos currently operates the largest ethyl acetate unit in Europe.
Noting that some oil majors have been building their petrochemical divisions to diversify through the energy transition —which is still expected to see global petchem demand rise sharply— the Royal Bank of Canada analyst Biraj Borkhataria said;
"This deal marks BP's shift away from the chemicals business over the long term, and effectively removes this option, in our view"
Following the deal, BP said it has now met its current $15 billion divestment target through 2019 and 2020, a year earlier than expected, adding that the proceeds from the sale will be used for "general corporate purposes".
However, the move comes two weeks after BP said it plans to write off up to $17.5 billion worth of assets after cutting its long-term price assumptions for oil and gas to reflect expectations that the coronavirus pandemic will accelerate a shift away from fossil fuels.
The deal will also give BP more financial flexibility as it strives to "reinvent" the company as a more diversified, low-carbon energy group.
Indeed, selling the energy-intensive petchem operations could help BP with its ambition of becoming a "net-zero" carbon emitter by 2050.
The company continues to have relatively high debt, mostly reflecting the cost of the 2010 Gulf of Mexico spill which has ballooned to over $65 billion. BP's net debt rose by 10% during the first quarter of 2020 alone to over $60 billion, sending its debt gearing soaring to 36.2%, well above its 20%-30% target range.
With oil prices still well below pre-pandemic levels, BP has said it expects its debts to increase further in Q2 and remain outside the target range into 2021.
BP plans to provide a detailed update on its efforts to become a lower carbon company at a strategy presentation in September.
Under the terms of the agreement, Ineos will pay BP a deposit of $400 million and will pay a further $3.6 billion on deal completion. An additional $1 billion will be deferred and paid in three separate installments of $100 million each in March, April and May 2021, with the remaining $700 million payable by the end of June 2021.
Subject to regulatory and other approvals, the transaction is expected to complete by the end of 2020.