Cabinet okays BP picking 30% stake in 21 Reliance blocks

The $7.2-billion Reliance Industries Ltd-BP Plc deal has been cleared.

The Cabinet Committee on Economic Affairs (CCEA) has allowed British firm BP Plc to acquire 30 per cent participating interest in 21 oil and gas blocks of RIL including the premium KG-D6 gas fields.

“This transaction will not only bring in major foreign investment, but also see induction of technological expertise into the sector,” the Petroleum Minister, Mr S. Jaipal Reddy, said.

In February, Reliance had agreed to sell 30 per cent stake in 23 blocks won under various licensing rounds in part to benefit from BP's deepwater exploration expertise.

While the nod for 21 blocks came through on Friday, for two blocks — in Assam (on-land block AS-ONN-2000/1) and in the North-East Basin (NEC-DWN-2002/1) — the Ministry will take a decision pending resolution of the difference between the Directorate-General of Hydrocarbons and the operator.

Reliance will retain operatorship of all blocks. The two have been holding divergent views on the exploration phase of these non-producing blocks.

According to the RIL-BP announcement, BP will pay RIL an aggregate $7.2 billion. Future performance payments of up to $1.8 billion could be made on exploration success that results in development of commercial discoveries.

The deal size may rise to $20 billion with future performance payments and investments.

“The permission has been granted subject to submission of all guarantees and documents by BP Exploration (Alpha) Ltd in terms of the provisions of the respective production sharing contracts,” the Minister said.

In other words, the parent BP will have to furnish a bank and performance guarantees as prescribed under the production sharing contract.

Technical capabilities

Acknowledging that his Ministry had all the technical capabilities of approving the proposal on its own, the Minister said, “The size of the deal is big.”

At present, 100 per cent foreign direct investment is permitted in the oil and gas exploration and production sector under the automatic route.

This allows companies to invest without going through the Foreign Investment Promotion Board or the CCEA.

Reliance may have to fork out some taxes if it makes any gains out of the deal.

By roping in BP, Reliance hopes to check the fall in output from its D6 gas fields.

Drop in output

RIL, which has spent over $5.5 billion in the development of the block, has not been able to contain the drop in output caused because of decline in reservoir pressure and ingress of water.

The company is currently producing 48 mscmd from the fields.

While the Europe’s second biggest oil firm will pay $7.2 billion in three tranches in FY12, some analysts said Reliance will not be liable to any income tax on the receipts.

The $7.2-billion deal is seen as the biggest FDI into India. Other proposed big transaction — Posco’s $12-billion investment announced years ago for a steel plant in Orissa — is yet to take off.

Reliance is the operator in all the 23 blocks while Canadian Niko Resources and UK’s Hardy Oil have minority 10 per cent interest in a few. After the deal, Reliance holding in the blocks will come down to 60-70 per cent. 19 out of 23 blocks lie off the east coast while two blocks are onland in Assam and Gujarat.

Reliance currently produces about 47.5 mmscmd of natural gas from its mainstay KG-D6 fields off the Andhra coast. Niko Resources of Canada has 10 per cent interest in the block and after the BP deal, Reliance’s stake would fall to 60 per cent.

Besides KG-D6, Reliance’s second biggest discovery block is NEC-25 in the Mahanadi basis off the Orissa coast. It has so far made 15 exploratory successes in the block, where Niko holds 10 per cent stake. Post BP deal, Reliance stake in this block too will fall to 60 per cent.

Reliance has a potential resource of 9.5 Tcf in KG-D3 block. Hardy has 10 per cent in the block and Reliance 90 per cent. Besides, it has made oil discoveries in Cambay onland block.

In KG-D6 block, Reliance has so far made 19 oil and gas discoveries, of which it has put two gas — Dhirubhai-1 and 3, and one oil find — MA — into production.

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