BP, Chevron Team Up for China Offshore Block

(Dow Jones Newswires), June 23, 2010

BP is teaming up with Chevron in bidding for a South China Sea exploration block, a person familiar with the matter said, signaling that the U.K. major's failure to stop a leaking Gulf of Mexico oil well isn't deterring rival producers from choosing it as a partner in deepwater projects.

Chevron will have a 60% stake in the block and act as operator, with BP holding the remaining interest, the person said. Cnooc (CEO), the listed unit of China National Offshore Oil, has the right to take a 51% stake in the block if the companies make a commercial oil or natural gas discovery.

The deal is currently awaiting approval by China's Ministry of Commerce, the person said, without disclosing financial terms. It wasn't known whether Cnooc would exercise pre-emption rights on the asset.

Although the person didn't identify the block, a China-based industry official said Oklahoma City-based Devon has selected BP and Chevron as preferred buyers for block 42/05. Water depths in the block--located around 250 kilometers south of Hong Kong--range from 198 meters to more than 1,980 meters across an area spanning nearly 7,000 square kilometers.

Spokesmen for all companies involved in the deal declined to comment when contacted by Dow Jones Newswires. The Ministry of Commerce declined to disclose information on the proposed deal.

BP's involvement in the bidding shows its appetite for deep water investments still holds, despite the damage to its reputation inflicted by the huge amount of oil still leaking into the U.S. Gulf of Mexico since April when a drilling rig exploded and sank.

The company's repeated failures at a temporary solution to patch the leak has heightened scrutiny of its response, and it is still working on a permanent fix to the well leak.

BP's shares on the London Stock Exchange have fallen around 50% since the well began leaking. It has set aside $20 billion in an escrow account to meet compensation claims from the oil spill and also said it will suspend dividend payments, reduce capital expenditure and step up asset sales.

Steve Westwell, BP's Global Chief of Staff, said Tuesday the spill promises to have a "profound effect" on the industry, but added that the event should not "stop all further deepwater production" because the industry overall enjoys a good safety record after 20 years in the Gulf.

Driven away from rich onshore deposits by increasingly confident national oil companies in the last two decades, majors such as BP and Chevron and large independents such as Anadarko sought their future growth in uncharted depths.

In the deep waters off the U.S. Gulf Coast, as well as offshore Brazil and West Africa, the companies found massive oilfields that were a major source of profits even as they had to invest billions to extract the crude. Due to the importance of these big projects, oil companies kept investing in them during the recession even as they cut costs elsewhere.

Interest in the South China Sea as a new frontier area for deepwater drilling was ignited by Canada's Husky Energy's discovery of an estimated 4 trillion-6 trillion cubic feet of recoverable gas reserves beneath 1500 meters of water in June 2006. Husky has since drilled more successful wells, and is planning to pump its first gas there in 2013.

Companies with existing deepwater acreage in the South China Sea are Anadarko and BG Group of the U.K.

Devon is selling all its China assets, as part of a broader pullout from offshore and international oil and gas operations, to focus on its onshore assets in North America. Earlier this month, it completed the US $515 million sale of its 24.5% interest in a producing shallow-water oil block in the South China Sea to Cnooc.

Much of Devon's remaining acreage in the South China Sea is lightly explored, a factor that is as attractive to foreign companies like Chevron and BP as the relatively close proximity of the blocks to the densely populated province of Guangdong in southern China and Hong Kong, which are natural markets for oil or gas finds.

Block 42/05 is adjacent to Husky's acreage where it had the major gas find, although Devon didn't find commercial quantities of oil or natural gas when it drilled a wildcat well there in 2008.

Separately, Chevron is bidding on its own for Devon's two other South China Sea assets--block 53/30 and block 64/18--and is the front-runner for a deal, the industry official said.

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