A deal of convenience

A deal of convenience

Some have dubbed it the mother of all oil and gas deals in India. Others would like to characterize it as the wages of rents accruing to a natural resource-intensive company. The fact, however, is that the $7.2 billion deal between Reliance Industries Limited (RIL) and BP is a different bird.

Announced with fanfare in London on Monday, the deal will see RIL transfer a 30% stake in its 23 oil and gas blocks—including the important Krishna-Godavari (KG D6) block. Future payments, linked to performance, could fetch an additional $1.8 billion to RIL. A planned 50:50 joint venture to market gas could take the investment and payment amount to $20 billion.

In itself, the stake sale has resulted because of the benefits the two companies see in it. For RIL, which has seen a slowing of output from the KG D6 block in recent months, the technical know-how that BP brings may prove valuable. This would not only be so for sorting out the problems in the KG D6 block, but also in exploring offshore hydrocarbon blocks.

Indian companies do not have sufficient technical expertise to be successful in such ventures single-handedly. For BP the prospect of entering an energy-hungry market makes much sense.

At the broader level, the deal should be seen in the context of the lukewarm investment climate that prevails in India at the moment. Much has been written about the lack of reforms hampering the flow of foreign direct investment (FDI) in the country. The deal should be seen as a sort of counterfactual in this respect: Imagine the spigots of FDI that would be opened if reforms were to be initiated. While it is true that such investments tend to be “lumpy" and, seen in isolation, tend to paint a distorted picture of FDI inflows, their importance in stressing the “India story" should not be underrated. If anything, the United Progressive Alliance government should awaken to the possibility that if it takes appropriate steps, FDI flows can resume their old pace once again.

In terms of valuation—always a concern when it comes to evaluating the stock of natural resource-intensive companies—the mild change in the RIL stock and that of BP shows the deal has been priced at a “fair value." An abrupt movement in the stock of the two firms would have indicated something else. That appears not to be the case.

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