Tuesday, February 22, 2011

RIL-BP deal: Betting Big



BP, the world’s fourth largest oil company, has signed a historic deal with India’s Reliance Industries to pursue joint exploration opportunities in the latter’s 23 oil and gas blocks including its trophy asset KG D6 block.

“I believe our future is in deepwater exploration, and I'm very positive about the east coast of India. BP is the best in deepwater exploration. If you want to climb Mount Everest, you must have the best team.”
- Mukesh Ambani, Chairman, Reliance Industries, on tie-up with BP

The contents of the above quote tell it loud and clear: Mukesh Ambani, Chairman of India’s largest private sector player and one of the world’s top petrochemical companies, is aiming big, as ever, but what is different this time around is that he will be aiming to make it big not alone but in the company of another biggie, British Petroleum or BP, the global oil giant. 

The two companies have just announced a historic partnership wherein the London-headquartered BP will acquire a 30% per cent stake in RIL’s 23 oil and gas blocks including its trophy asset KG D6 block besides forming a 50:50 joint venture for sourcing and marketing of gas in India. Valued at $7.2bn, it is being touted as India’s largest FDI deal so far. And if every thing goes as per plan, RIL will be receiving a total of $20bn from BP that includes future performance payments of up to $1.8bn as well as combined investment over a period of time. “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,” Ambani told. 

A win-win deal

The deal is a win-win proposition as the two companies bring complementary skills to the table. While Reliance brings with it its outstanding project management track record and operations expertise, in BP it finds a partner that is counted among one of the finest deep water exploration companies in the world. In other words, BP’s expertise in deep water technology would come handy to the Indian oil major; the output at RIL’s D6 field, owing to some technical issues, has reportedly fallen, , from a peak of 60 million standard cubic meters a day (mmscmd) a year ago to 50.97 mmscmd (1.8 billion cubic feet per day). Also, the deal would help RIL pursue its foray into the promising LNG segment.
The deal, which is BP’s largest ever investment in any single basin anywhere in the world and is also the largest ever FDI in India, marks BP’s shift in focus towards emerging economies, notably BRIC, away from the traditional western markets where it faces growing scrutiny over oil spill, maturing reserves, and dwindling profits. Last month, it entered into a $16bn share-swap deal with Russia’s state-owned oil company Rosneft to jointly pursue exploration opportunities in three Arctic offshore blocks said to be containing some 60 billion barrels of oil and gas.

The latest deal which is being projected as a ‘Transformational Partnership’ fits perfectly into the CEO Bob Dudley’s scheme of things as he looks to forge alliances in emerging economies with rich haul of natural resources.  

As per the terms of the deal, RIL will continue to be the operator under the production sharing contracts, whose blocks lie in water depths ranging from 400 to over 3,000 meters. These currently produce about 1.8 billion cubic feet of gas per day (bcf/d), over 30 per cent of India’s total consumption, and over 40 per cent of India’s total production. According to BP’s Energy Outlook 2030, energy consumption in India is forecast to more than double over the next 20 years, growing at a rate of over 4% per annum while it predicts the demand for gas to grow at nearly 5% a year between 2010 and 2030.  
The aggregate gross profits attributable to BP’s 30 per cent share of the 23 production sharing contracts to be acquired is Rs. 1336 crore ($300mn), as derived from the aggregate EBIT under the production sharing contracts for the financial year ending 31 March 2010, a company estimate suggests.

However, the deal is subject to approval from the government and the regulators. And as the Cairn-Vedanta deal, which is currently facing regulatory hurdles, underlines, never undermine political risks.

(image courtesy: BP)

Amy, Chief Editor

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