BP-Reliance deal may usher fresh oil, gas investments

Written by Reuters | New Delhi | Updated: Mar 5 2011, 07:15am hrs
BPs $7.2-billion-deal to jump into Indias oil and gas sector with Reliance Industries is the first sign of new investment that could attract more players, helping to boost output and meet surging demand.

Asias third-largest economy is expanding at more than 8% a year. But it struggles to pump even a third of the oil it guzzles, while gas use limited by poor infrastructure is already 30% more than production.

India has sought to attract the big international players since 1999 with its New Exploration Licensing Policy (Nelp) but still only two foreign companies BG and Cairn Energy are producing any serious amounts in the country.

This deal brings in one of the majors in a material way. Twenty-three blocks and an important gas play, said Richard Quin, lead analyst for West Asia, North Africa and India at energy research consultancy Wood Mackenzie. I suspect the government is very happy about it.

BP, which has only one block, picked up through the government auctions, is now paying Reliance for a 30% stake in 23 of its blocks, including the big gas producer D6 in the Krishna Godavari basin.

The blocks now produce about 1.8 billion cubic feet/day (bcf/d) more than 40% of the coubtrys total production and more than 30% of total consumption.

The British-based company figures there are at least 15 trillion cubic feet (tcf) of gas resources in the blocks enough to meet Indias current rate of consumption for seven years.

It is BPs biggest investment in exploration and production in Asia, with a potential total of $20 billion linked to exploration successes.

It would be wrong to downplay the prospectivity of the 23 blocks. There has to be a reason BP bought in. Fundamentally, BP is in the business of producing hydrocarbons, Quin said.

At the same time, BP could use its technical expertise to boost output at Reliances D6 block.

It is Indias biggest gas find but output has slipped because of technical problems to about 52 million cubic metre a day (mcm/d) from 60 mcm/d in October and short of a target 80 mcm/d.

Reliance Industries will benefit from the tie-up with BP by being able to take advantage of BPs technical capabilities, analysts said, in turn enhancing the valuation of Indias biggest companys existing assets.

BP India head Sashi Mukundan would not be drawn on future output estimates.

The chance to boost domestic production has clear attractions for the government as it struggles to balance the need for growth to help half a billion people out of poverty with pressure to keep a lid on scorching fuel and food inflation.

BP expects gas demand in India to grow nearly 5% per year to 2030 -- slightly slower than the economys current pace near 9%. Consumption, limited by creaky infrastructure, should exceed 15 bcf/d by then, according to BP.

Wood Mackenzie is more conservative but still expects demand to hit 13.18 bcf/d in 2030 from 5.34 bcf/d in 2010. But New Delhi will have to ease controls on pricing in order to ensure new, potentially more expensive, output comes onstream.

New discoveries would need a higher gas price than is currently being charged for the D6 gas ($4.2/mmbtu), RBS analysts said in a research note.

BPs Mukundan said the market could support higher prices.

Latent demand is being fully utilised and ... new demand will be created on market fundamentals. Its not going to be based on subsidy regime, he said.

Oil and gas prices internationally are near record highs but in India, the government controls pricing and subsidises output from older fields operated by state-run companies in an attempt to foster industrial growth and cushion its poorest voters.

BP and Reliance are also planning to join together to source and market gas in India -- likely to focus on liquefied natural gas (LNG) and potentially the construction of a terminal, giving even more choice for the energy-starved economy.

India will definitely benefit from this deal as Reliance Industries could invest ... for development of infrastructure, Amrit Pandurangi, senior director at Deloitte India, said.