BP-RIL deal: Striking it rich

Raghuvir Srinivasan Chennai | Updated on March 01, 2011


BP's investment in 23 exploration blocks of Reliance Industries, including the richly endowed KG- D6, is significant for several reasons. The first is that it underlines the tremendous upside potential for gas output from the KG-Basin field as BP is probably the most experienced among Big Oil in deepwater exploration and production.

And it is committing big money at a time when it is shedding investments in several ventures elsewhere across the world. Even by oil industry standards where hundreds of millions of dollars is considered small change, the $7.2 billion that BP will invest over fiscal 2011-12 for a 30 per cent stake in Reliance's blocks is a substantial amount, especially if you consider that BP is coming off a $4.9-billion loss in 2010, its first in two decades.

That BP did its homework thoroughly was evident from its CEO, Mr Bob Dudley's remark at the press conference in London on Monday that technical experts from his company spent four-five months analysing the data and studying it in Mumbai and London.

The second significant point is that the deal gives the British multinational a big toe-hold in the burgeoning gas business of India. Also part of the deal signed on Monday is a 50:50 joint venture that will “endeavour to accelerate the creation of infrastructure for receiving, transporting and marketing of natural gas in India”. The choice of words in the statement is interesting and probably points to future plans for a liquefied natural gas (LNG) terminal for BP to import gas into the country. The joint venture is probably a sweetener granted by Reliance to make the deal more attractive to BP and also sell it to its shareholders. But what it does is introduce an altogether new player in the integrated gas business in India.

Third, the deal gives Reliance access to some desperately needed technology to not just shore up the falling output from the D6 field but also raise it to a higher level. From a peak of 60 million standard cubic metres a day (mmscmd) a year ago, output has now dropped to a mere 50.97 mmscmd (1.8 billion cubic feet per day) clearly pointing to the technical problems that Reliance is encountering in the field. BP is well-versed in deepwater technology — the Deepwater Horizon disaster notwithstanding — from its experience in the Gulf of Mexico, and is well-placed to help Reliance set right the problems in D6. With BP's technology backing it, Reliance can now speed up exploration and production in its other deepwater blocks in the KG- Basin and elsewhere.

Fourth, the $20 billion investment that the deal will eventually bring forth over the next few years is four-fifths of the total FDI received by India last year. With the sheer size of investment, not to forget the players involved, the deal presents a fait accompli to the Oil Ministry so far as approvals are concerned. Surely, there can be no delays on this one! For Reliance, which is already cash rich, the $7.2 billion that will flow in next fiscal is a bounty and can help repay half its debt of $15.7 billion as of December 31, 2010, if the company chooses to do so.

Finally, it is interesting to see that the deal is structured by the ‘farm-in' route where a new partner is inducted into an existing block. The alternative was, of course, equity partnership with the blocks hived off as a separate company. But BP seems to have been smart in learning from Chevron's none-too-happy experience with equity investment in the erstwhile Reliance Petroleum.

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Published on February 22, 2011
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