Oil giant BP plc (BP - Free Report) along with its co-venturers has inked a modified and restated Azeri-Chirag-Deepwater Gunashli (ACG) field production sharing agreement (PSA).
Per the new agreement, Azerbaijan's government has extended the production sharing deal for the country’s massive ACG oilfields until 2049. The current deal was slated to end in 2024.
Per the deal, BP and its partners will have to make a one-time payment of $3.6 billion to the State Oil Fund of the Republic of Azerbaijan.
Under the new accord, State Oil Company of the Republic of Azerbaijan (“SOCAR”) has increased its shareholding to 25% from 11.65%. BP’s shareholding has dropped to 30.37% from 35.8%, though it continues to be the operator of the field. Shareholding of other co-venturers comprising Chevron Corp. (CVX - Free Report) , Statoil ASA (STO - Free Report) ExxonMobil Corp. (XOM - Free Report) , Inpex, TP, ITOCHU and ONGC Videh Ltd. has been lowered to 9.57%, 7.27%, 6.79%, 9.31%, 5.73%, 3.65% and 2.31%, respectively.
Located in the Azerbaijan Sector of the Caspian Sea, the first PSA for the ACG field was inked in 1994. The field has received investments of over $33 billion and has yielded about 440 million tons of oil. This has aided the country to rake in a direct net profit of $125 billion. Total production from ACG averaged 585,000 barrels per day during the first half of the year.
Over the next 32 years, more than $40 billion can be invested in the ACG field. The new contract also allows SOCAR and its co-venturers to advance with engineering development work to evaluate another production platform in the ACG-contract area.
The extended contract is a major milestone for BP amid the ongoing price volatility. It will provide regular revenues to the company for almost the next three decades and also increases the company’s backlog.
We appreciate the rigorous capital allocation strategy of BP. Majority of the capital will be spent on growth projects. Also, the company’s drilling operations are getting efficient as reflected by the steady decline in non-productive time since 2012. However, BP’s reliance on Russia and offshore activity worldwide increases uncertainty given sanctions and low oil prices. As Russia is the second-largest contributor to BP’s production and earnings after the U.S., Russian sanctions would adversely affect company’s operations and also the dividend income it is receiving from its Rosneft stake.
BP’s shares have increased 3.2% compared with the industry’s gain of 4.5%, over the past three months.
Currently, BP carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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