BP’s offer to share bank guarantee with RIL hits a glitch

Siddhartha P Saikia Richa Mishra New Delhi | Updated on November 24, 2017

Petroleum Ministry asks the UK firm to justify how it can share guarantee when it was not a party to Reliance’s arbitration

The issue of British oil company BP Plc sharing the responsibility of furnishing a bank guarantee along with Reliance Industries for KG-D6 gas seems to have got caught in a technical tangle.

The Petroleum and Natural Gas Ministry wants BP to justify how it can share the bank guarantee when it was not a party to the arbitration filed by RIL. The Indian firm is disputing the ministry’s decision to disallow some of the expenditure incurred in the East Coast gas fields for producing less than what was proposed in the field development plan.

“Since BP is not party to the arbitration filed by RIL, the question on whether the British major can qualify for sharing equal responsibility with its India partner has arisen,” a senior Petroleum Ministry official said.

Besides, it does not meet the commitments of the production-sharing contract (signed between the companies and the Government for exploring and producing mineral resources), the official said, adding BP had sought time to revert.

According to the production-sharing contract, both BP and Niko Resources of Canada are full joint venture partners of RIL in the KG-D6 block. The joint operating agreement between the contractors – BP, Niko and RIL – authorises the operator, in this case RIL, to act on behalf of the consortium. This includes dealing with the Government. Recently, BP and Niko had written to the ministry that they, too, would shoulder the responsibility of the bank guarantee along with the Indian explorer.

The partners were reacting to the terms of the draft supplement agreement for the bank guarantee, to be paid by the consortium. The agreement, prepared by the ministry, mentioned the Indian firm’s name. RIL and its partners have to pay the bank guarantee to benefit from the higher gas price effective April 1.

According to RIL, the guarantee has to be paid by all three consortium partners depending on their stake (RIL has a 60 per cent stake in the block, BP 30 per cent and Niko 10 per cent).

Only after the principles of bank guarantee calculations and process of furnishing are finalised, the amount will be decided.

Indications are that the new gas price may hover around $8 a unit (gas is measured in million British thermal units). If the price is over $8.4 a unit, the bank guarantee on a quarterly basis could be in the range $100-$120 million, and could go up to $130 million, depending on the price.

Published on February 26, 2014

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