BP to buy 30% in RIL blocks

While the deal will help BP expand its global footprint, it will give RIL access to better technology and that will help it realize better value from its hydrocarbon assets. The deal values RIL’s 23 oil and gas blocks at $24 billion.

The transaction will have to be approved by the Indian government and comes at a time when an acquisition in the hydrocarbon sector involving Vedanta Resources Plc is yet to receive regulatory approval. Still, no state-owned firm has a stake in any of RIL’s blocks; Oil and Natural Gas Corp. Ltd’s (ONGC) stake in one of Cairn India Ltd’s blocks have held up Vedanta’s acquisition of that company.

As part of the deal, which has been in the making for the last five years, RIL and BP will also form an equal joint venture (JV) for “sourcing and marketing gas in India", that will also have the necessary infrastructure.

According to a joint BP, RIL press statement: “Future performance payments of up to $1.8 billion could be paid based on exploration success that results in development of commercial discoveries. These payments and combined investment could amount to $20 billion."

RIL chairman Mukesh Ambani clarified at a press conference in London that the investment estimate is indicative and includes exploration, production of offshore hydrocarbons, and gas marketing and transportation

“The partnership would result in the single-largest FDI in the history of India, and one of the largest in any emerging market in a single year... The deal is subject to necessary approvals, the framework for which has been laid down in Nelp (new exploration licensing policy) and we expect to apply and get the necessary approvals soon," said Ambani.

The deal is expected to be completed in the next fiscal.

Mint had reported on 7 February that BP was in talks with RIL to buy 30-45% in the D6 block. BP has an existing relationship with RIL in the D-17 deepwater block in the KG basin as an operator with a 50% interest.

“Aggregate gross profits attributable to BP’s 30% share of the 23 production-sharing contracts to be acquired is Rs1,336 crore...for the financial year ending 31 March 2010," the firms said.

RIL, India’s biggest firm by market value, holds a 90% stake in the KG-D6 field off the eastern coast of India, hailed as the world’s largest natural gas discovery in 2002. Canadian hydrocarbon explorer Niko Resources Ltd owns the remaining 10%. RIL has 29 blocks in its portfolio.

The development comes at a time when output at the offshore block has fallen to 50-52 million standard cubic metres per day (mscmd) from over 60 mscmd in mid-2010. Gas is being pumped from 18 wells in the block.

While Ambani did not respond to Mint’s question about the fall in production being a trigger for the deal, he said: “From Reliance’s point of view, to really bring the deep waters of India on the east coast, BP’s capabilities and competencies will help us find more hydrocarbons. It is one of the core reasons for this transaction."

According to the projections made by India’s oil ministry regarding gas availability from the D6 block that were reviewed by Mint, the field is expected to produce 59.4 mscmd in 2010-11, with the production reaching a peak of 88.5 mscmd in 2012-13.

“The transaction is profound as its involves the entire gas chain from upstream exploration and production to transportation and marketing... India has historically not been able to attract major investment from energy majors, and this transaction can be a game changer," said Gokul Chaudhri, partner at tax consulting firm BMR Advisors.

After the Deepwater Horizon spill in the Gulf of Mexico in the US in April, BP has been looking to invest in new areas. In January, BP and Russian oil producer OAO Rosneft announced a $7.8 billion strategic equity-linked partnership.

BP chief executive Robert Dudley said the payment to RIL would be staggered and funded mostly through the cash accruing to BP through the divestment of its assets worldwide. Apart from the existing cash on its balance sheet, BP is closing various divestment deals worth $22 billion and would be disposing of assets worth another $8 billion this year, Dudley said.

When asked if the partnership could see BP picking up an interest in some of RIL’s other businesses such as fuel retailing, Ambani said the partnership was a “multi-decade" one and this was only the beginning.

S.P. Tulsian, a Mumbai-based stock market analyst, said: “Definitely this deal is positive for RIL. The deal appears expensive to me, but that is good for Reliance. Also, BP will bring in technical expertise, which will help RIL improve production."

S. Sundareshan, secretary at the ministry of petroleum and natural gas (MoPNG), confirmed the stake sale would need government approval.

India is yet to decide on Vedanta’s proposed acquisition of a majority stake in Cairn India for $9.6 billion. MoPNG has decided to take the issue to the cabinet committee on economic affairs and any delay in the decision will make it difficult for Vedanta to meet the transaction deadline of 15 April. State-owned ONGC, Cairn India’s partner in a JV that runs the latter’s main oil asset in the country, has made the resolution of a royalty payment dispute a precondition for the deal’s approval.

While a Cairn Energy spokesman declined to comment, BMR’s Chaudhri said: “The contours of the two transactions are distinct—the Cairn-Vedanta transaction is a share transaction involving change in the controlling interest over the assets. The transaction between BP and Reliance involves participation at the asset level with no change in the operatorship. In either situation, the government needs to recognize that such transactions are integral to the working of a vibrant upstream industry with regulatory approvals granted in a transparent and timely manner."

utpal.b@livemint.com

Divya Guha, Pallavi Pengonda and PTI contributed to this story. 

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