The deal adds 527 service stations and 16 sites under construction to the 350 outlets BP already owns in the country.
The supermarket's four-cent-a-litre discount offer and rewards programs will be expanded to some BP stations, giving motorists more places to get cheaper petrol and collect points for airline tickets.
The cash will be used to strengthen the Woolworths balance sheet and reinvest in its core businesses. The potential partnership would be designed such that it enhances the value for its customers and reward them for their loyalty and support.
Woolworths had been mulling over a potential sale of its fuel business for some time as the company has been under pressure to preserve capital after its failed home improvement venture Masters saw it post a loss of $1.2 billion in its full year results in August, while petrol and food sales also slumped.
In addition, a new "Metro at BP" store format will be jointly developed by both parties. Those discounts will also be available at BP outlets, which Woolworths says means that there will be a convenient service station that accepts discount vouchers near 80% of its supermarkets (up from 75%).
BP's Australian president Andy Holmes said: "We are excited to bring BP's global expertise and success in food and convenience offers to Australia through this partnership with Woolworths".
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Woolworths´ existing fuel partner, Caltex Australia, expressed its "disappointment" over the end of their partnership and failing to acquire the gas station network.
While the deal is expected to close not earlier than 2 January, 2018, it is subject to customary terms and conditions.
BP downstream chief executive Tufan Erginbilgic said in a separate statement that it has similar and successful partnerships globally with retailers such as Marks and Spencer.
Pending approval from the Australian Competition and Consumer Commission (ACCC), and the Foreign Investment Review Board (FIRB - considering BP's British heritage), the deal is expected to be finalised in around 12 months.
ASX-listed Caltex Australia, which paid $340 for Gull NZ's 77 sites and other assets, had offered $A1.5 billion for the Woolworths chain.