In a landmark deal that could significantly boost the fortunes of Reliance Industries (RIL) and give the country?s oil exploration sector a technical edge, UK-based global oil major BP will take 30% stake in 23 oil and gas production sharing contracts that RIL operates in India, including the KG D6 block, for $7.2 billion (around Rs 32,400 crore).
BP would also make further performance payments of up to $1.8 billion (Rs 8,100 crore) based on exploration success that results in development of commercial discoveries. Yet another $11 billion would be invested, over the years, in a 50:50 joint venture formed by the two companies for sourcing and marketing gas in India, taking the overall investment in the partnership to $20 billion (Rs 90,000 crore).
?This partnership combines the skills of both companies and will be focused on finding more hydrocarbons in the deep water blocks of India and significantly contribute to India?s energy security,? RIL chairman and managing director Mukesh Ambani said. Carl-Henric Svanberg, chairman, BP, said that the partnership was in line with BP?s strategy of forming alliances with strong national partners, ?taking material positions in significant hydrocarbon basins and increasing our exposure to growing energy markets?.
?BP?s confidence in India is evident from the fact that the transaction constitutes one of the largest foreign direct investments into India,? a release from the company added.
Reliance will continue to be the operator under the production sharing contracts, whose blocks lie in water depths ranging from 400 to over 3,000 metres. These currently produce about 1.8 billion cubic feet of gas per day (bcf/d), over 30% of India?s total consumption, and over 40% of India?s total production. The 23 oil and gas blocks together cover nearly 270,000 sq km, making the partnership India?s largest private sector holder of exploration acreage. Ambani said 19 of the 23 blocks will be on the east coast of India, which has the highest potential.
In what will be the single-largest foreign direct investment (FDI) flow into India ever, Ambani said RIL expects to receive an initial amount of $7.2 billion within the next financial year (2011-12), once the governments of both countries approve the deal. While $1.8 billion will come in as explorations at its blocks successfully progress, the remaining $11 billion would come over ?several years? as investment to build the JV and into the existing exploratory blocks, he said, adding the company will apply for government approvals ?very soon?. ?This is a multi-year commitment. In the next financial year, we expect to get all the initial money into India and then vigorously explore and find hydrocarbons in the country,? he said.
?RIL will benefit from BP’s deepwater drilling capability since the deal is going to see a long-term commitment to develop gas transportation infrastructure,? said Dilip Khanna, Partner, Ernst & Young. Khanna added that the valuation was justified with analysts having valued RIL?s upstream business at around $30 billion implying $9 billion for a 30% stake.
According to Sanjeev Prasad, managing director, Kotak Institutional Equities, the inflow of $7 billion would add to RIL?s gross cash flows are expected to be in the region of $7 billion annually in the next few years. ?The partnership is positive for RIL?s E&P business and is likely to accelerate exploration activity and address any technical issues at the KGD6 basin,? Prasad added. Shares of RIL, India?s largest company by market capitalisation, closed 2.04% higher at Rs 956.50 on Monday, compared to the previous day?s close.
BP?s deal with RIL comes at a time when gas output from the KG D6 block has been on the decline, falling from over 60 million standard cubic metres per day (mscmd) in mid-2010 to 50-52 (mscmd). RIL holds 90% in the KG D6 block, while Canada?s Niko Resources holds the rest. Last week, Niko warned that output from the block will continue to be flat at current levels for yet another year. RIL, which has been trying to arrest the decline, had earlier said it was also reviewing the safety and reservoir management of the block for which some studies were going on.
Commenting on gas pricing in India, which has been a matter of much debate in the country, Ambani said all the blocks have been procured through the New Exploration Licensing Policy (Nelp) auctions.
?There is a straightforward policy in place and those prices are appicable to us,? Ambani added. Ambani and Robert Dudley, BP group chief executive, signed the relationship framework and transactional agreements in London.
Arvind Mahajan, ED, KPMG, felt the deal was a positive development for the Indian economy as a whole, coming as it does after a spate of bad news including lukewarm participation from MNCs in the latest NELP round of bids, the delay in executing the Cairn-Vedanta deal, and a slowdown in FDI. ?For the first time, such a major investment has gone into a production asset. The deal endorses BP’s faith in RIL’s assets and will help RIL leverage on the British giant’s technological acumen,? Mahajan observed.
BP has been working with Reliance since December 2008 on the D-17 deepwater block in the KG basin. BP, with a 50% interest, operates the block and Reliance holds the remaining interest. BP has been looking to invest in new locations after the devastating oil spill in the Gulf of Mexico in the US in April. Recently, the company and Russian firm OAO Rosneft announced a $7.8 billion deal on a strategic equity-linked partnership.
The joint venture will also endeavour to accelerate the creation of infrastructure for receiving, transporting and marketing of natural gas in India. The partnership will combine BP?s world-class deepwater exploration and development capabilities with Reliance?s project management and operations expertise, RIL said.
