New Delhi: Sashi K. Mukundan, country head, BP India, was closely involved in drawing up what will be the largest foreign direct investment in India. He spoke in an interview about the $7.2 billion (Rs32,472 crore) purchase of a 30% stake in Reliance Industries Ltd’s (RIL) 23 oil and gas blocks, including the D6 one in the Krishna-Godavari (KG) basin. Edited excerpts:
How were you able to bring this deal together?
This whole thing started for BP when we started getting interested in the upstream in 2005 with Nelp (new exploration licensing policy) V. If you recall, Nelp-V was the first time that we actually bid. We bid in Nelp-V and obviously we were not so successful. But it was the starting point for us to say “okay, here is a place where there is a possibility of building a material business for BP”. The issue is that we are not in all the countries in terms of E&P (exploration and production) per se. Our E&P is limited to a total of 15-20 countries. The idea being that we want to be in places where we can actually have a material presence, large enough scale, which will allow us to bring in our technologies in the market. We bid in Round 6, but we were spending the time to...really understand the Indian geological margins and really focus on what it is that we were looking for. And the more we looked, we saw with interest that there are a lot of possibilities in India, and if you remember that in the summer of 2007, RIL said that they were going to bring in a partner for D6. They came out with a competitive bid process where we, along with a whole bunch of others…pretty much all were there, there were seven-eight companies that had shown interest and had gone through the data room and we all came in and put in our offers. The initial screening was on a technical basis. We said, you know, let’s forget the numbers right now, we really want to understand who you are, what you are, what’s your thought process, how do you work with us? In the long run, we want to really understand, is this a partner that we can live with…here we fared quite well. Quickly, we got screened to be one of the top players for this. And as the time went by, we had all these issues that came up, between the two brothers and stuff. So this got kind of, actually there was an injunction on it where they couldn’t do anything.
Was that the first hiccup?
That was the time when we went through that. Then, in the meantime, what we did was we continued engaging with RIL in different discussions and that resulted in us bidding together in Nelp-VII. We bid for two blocks, D-16 and 17. We lost 16 to ONGC (Oil and Natural Gas Corp. Ltd), but we won 17. That also helped us build a good relationship not just at the top, but across the company …and the general feeling from both sides was that this seems like people who can work together, everyone was excited to work together, which gave the senior management more comfort that things can work together between these two companies. So while we were doing that, …we said let’s look at some exploration kind of a thing where you know, you bring us into some exploration which is not part of this whole dispute which is going on and we will bring you into some stuff elsewhere where you are interested… So all of this was going on since 2007, and then all of this kind of broke loose in terms of when they won the battle and so forth. Then we got much more serious on both sides. So by that time, our relationship had become so solid that it was very clear that okay, if you’re going to do something, great, let us do it with each other in India.
Even after the court case was resolved, was it smooth sailing?
No, so in the meantime, we continued discussing. It wasn’t like that we stopped…, but we basically said that we can’t do anything until we get a resolution on that, because Ambani’s (Mukesh Ambani) thought process was that he said—listen, I don’t want to drag you into this and now all of a sudden you get into a relationship with me and now you become a party to this whole thing. Why do that? Let it get to a conclusion…which made sense. So we kept doing this so that slowly it grew into a larger game. So we said, if we are doing it, let’s do it all together. Which is where it grew. Then we had our issue in the Gulf of Mexico. That again slowed things down. We said okay let’s hold now. It is wrong timing to announce this scale of deal when we were going through that crisis. Plus Bob (Robert Dudley, BP’s chief executive) and everybody else was very focused on getting the Gulf of Mexico right, doing the right things there. So we did that and then we came back and re-engaged.
When did the re-engagement start?
During Bob’s visit in October.
Where were the deal’s contours being worked out?
It was across—partly Bombay, partly in London and wherever the bosses met. There have been meetings in the US, in Davos, and elsewhere.
Was the British premier in the loop?
No, we told him before the deal was announced. We informed the British, they (RIL) informed the Indians. Ambani came in and met with the government here.
India’s Comptroller and Auditor General (CAG) is auditing RIL’s expenditure and everyone is waiting for the final report to come out. Are you concerned about the examination into whether there was any gold-plating (or over-statement of investments in KG D6)?
If you look at that particular project, it’s one of the best projects. If you look at any world-scale comparison, you will see that it’s been done efficiently. It can be benchmarked against any world-scale project around the globe. It is not gold-plating, it is justified. Probably they may have not even spent as much as what others would have spent in doing it. I think they have been pretty efficient. And you should keep in mind that why would I just park my money into something? For me, there is a time value of money. I want as little capital to go as I can. It doesn’t make any sense to say that I would inflate and put more into it.
So, no concerns at all?
I mean it is what it is going to be. You will have to deal with it. But the point being that when we look at the project, we feel that it is one of the best in the world and that it has been engineered well, it has been designed well and it has been built well both in terms of cost and the timing… What can we do at this point? We have to work with it.
What tax will be levied on this deal?
We don’t have any tax. We are the purchaser.
You want to be present across the entire gas value chain... Would you be interested in getting into it (power generation) because your Vietnam project has an associated power plant?
We have there (Vietnam), we have in Spain, we also have in UK power projects. For us, we are ultimately an oil and gas company. So, the intent is not to be in the power business for the power business’ sake. We will get into it if we feel that is the better way to monetize our gas, rather than saying that we will get into it because (the company wants to produce power).
Is that a possibility somewhere?
If it actually makes sense, but I would say it is more of a distant possibility, not clearly an immediate thing. The immediate thing would be if we get into infrastructure, it will be more pipelines, for LNG (liquefied natural gas) either we might take positions in existing LNG terminals… or if it is necessary, we will build our own.
A lot of LNG terminals are coming up with associated power units. It seems to make a lot of project sense.
We were the first ones to do that in Spain.
So are these the kind of possibilities that you might look at later?
Could be…if it makes sense. What happens when you have an associated power plant? There are two things. One is, you use the heat from the power plant to vaporize (LNG). The other thing is you use the coldness of that thing (LNG) to cool the inlet air. So what happens is that when you cool the inlet air, you will keep it at a constant temperature, whether it is summer, winter whatever. And by doing that you make the air more dense. When you have more dense air, the compressors work more efficiently. So it gives you an additional kicker (of) 2-3-5% more.
When the deal was being signed, was there any apprehension on your part as a lot of voices are being raised about instability in policies here?
No, because we are not looking at the short term. We are a long-term player in India. The fact that we are putting in $7 billion to come in tells you that we are looking here for decades, and in any democratic system you will have ups and downs and you will go through it. What’s important is to look at the trend. If you look back since 1991, we had governments come and go…the economy kept on growing… I am not worried about the short term. You will have hiccups. That is how it is. Every emerging market goes through those things, but it is the long-term trend that is important.
The deal comes at a time when a deal in the hydrocarbon sector involving Vedanta Resources Plc is yet to get regulatory nod. There has been political pressure from Britain too. What do you think is different about this transaction, regarding the deal structure and keeping stakeholders in the loop?
Basically, I see ours as a very straightforward situation where we are actually taking a participating interest in 23 blocks, which are all Nelp blocks. We have got partners in six of those blocks who have all consented to...bringing BP in and there is a clearly prescribed process as to how we go about farming into a Nelp block. We are following that model…I can’t see any reason for there to be a hiccup as you are not even changing operators, not that because BP is not a good operator or anything...
What do you think went wrong with the Cairn-Vedanta deal?
I don’t know. I don’t want to comment because I am not close to it to really understand the details of it. Only thing I know is that ours is more based on Nelp and it is part of the Nelp process.
What has been the reaction of the Indian government?
Generally, the reaction has been very positive across all sectors of the government. The general feeling is that this is good for India… That said, the ministry (of petroleum and natural gas) is very cautious to say that listen, we need to put in the papers for approval. We will look into the merits of the papers that have been put in and based on that, we would approve it. What they have told us is that we will assure you that we will do it as fast as we can and do it as efficiently as we can. They also recognize that it is 23 blocks…everybody wants to see something like this happen.