BASF Turns Driller to Shield Chemical Maker From Shale: Energy

Europe’s largest chemical maker is expanding oil and natural gas production faster than BP Plc (BP/), Royal Dutch Shell Plc (RDSA) and Total SA. (FP)

BASF SE (BAS), which agreed to acquire stakes in two Siberian fields yesterday, expects oil and gas production to increase 3.8 percent annually to about 440,000 barrels a day in the next three years, a plan that adds output quicker than any of Europe’s largest energy producers.

Founded 147 years ago as a dye manufacturer, BASF is Germany’s single largest user of natural gas. Chief Executive Officer Kurt Bock wants control of fuel supply to cut exposure to commodity price swings and blunt the advantage of U.S. rivals with access to cheap shale gas. The deal with Russia’s OAO Gazprom (OGZD) comes less than a month after a $1.4 billion asset swap with Statoil ASA (STL) to gain stakes in North Sea fields.

“BASF is clearly one of the companies that will provide Europe with energy in the next years,” said Lars Hettche, an analyst at Bankhaus Metzler.

Yesterday’s deal will boost BASF’s resources by the equivalent of 600 million barrels of oil, according to DZ Bank analyst Peter Spengler, or about nine months of German crude demand. BASF, which has increased oil and gas production 5 percent a year since 2000, is set to surpass industry stalwarts such as Hess Corp. (HES) and Marathon Oil Corp. as a producer over the next three years.

Russia is central to BASF’s energy strategy. The world’s largest oil-and-gas producing country will supply more than half of the Ludwigshafen, Germany-based company’s fuel when the fields acquired yesterday come on stream.

Russia Partnership

The partnership was born out of the Russian company’s desire to sell gas in Europe and BASF’s heavy demand on supplies in a German market that in the 1990s was dominated by Ruhrgas, later acquired by EON AG.

“It’s clever because they are not competing, but cooperating,” said Bankhaus Metzler’s Hettche. “I don’t think that Gazprom would have let BP in because they are a direct competitor, whereas BASF is simply wanting to play along.”

BASF will become a partner with Gazprom in developing two blocks in the Achimov deposit in western Siberia, with a 25 percent plus one share stake. Output from those fields, expected to start in 2016, will be equal to 20 percent of BASF’s hydrocarbon resource base, according to DZ Bank’s Spengler. BASF has an option to boost that stake to 50 percent.

“They’ve known they want access to those blocks for some time,” said Geoff Haire, an analyst at HSBC Holdings Plc. “BASF is the largest single user of natural gas in Germany, which is why they got into it in the first place.”

Rhine River

The German company, which employs more than 30,000 at its largest factory on the banks of the Rhine River, is also being put to the test by the boom in U.S. shale production. A slump in North American prices has handed competitors Dow Chemical Co. (DOW) and DuPont Co. an 8 percent profit advantage because they pay less for gas, according to Jeremy Redenius, an analyst at Sanford C. Bernstein Ltd.

Yesterday’s deal has the added benefit of diversifying earnings and providing a testing-ground for drilling lubricants and additives produced by BASF, said HSBC’s Haire.

The resumption of crude production in Libya helped Wintershall, BASF’s oil and gas production earnings double to 3.12 billion euros ($3.97 billion) in the first nine months of this year, a counterweight to lower sales of catalysts due to raw-material costs.

Production at Wintershall is expected to rise to 160 million barrels in 2015, up from an expected 140 million this year, according to a statement yesterday.

Bock’s Pledge

Expansion at Wintershall coincides with Bock’s pledge to spend 1.7 billion euros on the research and development of more cutting-edge materials and chemicals. Bock’s first 1 1/2 years at the helm of BASF have been dominated by deals related to oil and gas.

By contrast, Royal DSM NV is among Europe’s chemical makers exiting lower-margin products. It’s spent about 1.8 billion euros on purchases to expand in nutrition, and this week announced the sale of a plastomers joint venture to Borealis, 64 percent owned by Abu Dhabi.

With the Gazprom deal, BASF is moving in the opposite direction, providing the means to move upstream and boost production without the risk and expense incurred with developing prospects from scratch. It’s divesting assets that generated 350 million euros in earnings before interest and tax last year.

Shell Plans

Shell, Europe’s largest oil company, is closest to matching BASF’s growth. It plans to increase production 25 percent between 2011 and 2018, an average of 3.6 percent a year. Still, output has dropped so far this year.

France’s Total plans to increase output by 3 percent a year between 2011 and 2015. BP’s oil production has fallen as it sold assets in the wake of the Macondo oil spill disaster in 2010. Italy’s Eni SpA targets 3 percent a year growth.

Gazprom gains a 50 percent interest in part of Wintershall’s North Sea region. Following a year of negotiations over the value of assets to be swapped, BASF also agreed to cede its 50 percent share of the Wingas gas trading venture with Gazprom.

To contact the reporter on this story: Sheenagh Matthews in Frankfurt at smatthews6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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