29.7.11

RIL -BP deal gets the nod

The government on Friday gave its consent to UK energy major BP Plc taking 30% interest in 21 out of 23 acreages, including India’s gas bowl off the Andhra coast, being operated or explored by Mukesh Ambani’s Reliance Industries Ltd for over $7 billion. This will be the single-largest foreign investment in the country’s history, oil minister S Jaipal Reddy said while announcing the decision taken by the Cabinet’s panel on economic affairs. The consent for the remaining two acreages has been held back over technical issues and the government will approve stake transfer in these once the issues are sorted out, Reddy said. BP will have to give performance and bank guarantees according to the contract, he said. The approval to the farmout deal will bring some cheer to RIL shareholders who have seen their holdings battered since government auditors last month said the oil ministry and its regulatory arm had granted favours to the firm in its Andhra offshore gas field. As a business strategy, the farm-out deal with BP is Ambani’s master stroke. At one go, it will reduce RIL’s exploration risk burden and balance the company’s funds outflow to US shale gas ventures. Huge boost to RIL’s LNG ambitions Apartnership with BP will give RIL access to the UK’s major’s expertise in finding and pumping oil and gas from deep below seabed. RIL needs such frontier technology to arrest the sharp fall in volumes from the Andhra offshore field, which has left the exploration regulator fuming and the government in a quandary over a long queue of industries clamouring for gas. For BP, the deal marks an easy entry into India’s exploration sector. With a strong domestic player such as RIL, BP will not be exposed fully to the risks of going solo in a geography not seen as highly prospective. But the long-term upside lies in India’s growing market for gas, particularly the variety imported in ships (LNG, or liquefied natural gas). It is not clear whether RIL will have to pay capital gains tax on the transaction since under the acreage auction policy, the company is a contractor for an asset owned by the government. One option for tax authorities would be to treat the $7.2 billion that BP will pay to RIL as the latter’s business income. But even here, RIL can claim a set-off for the expenditure incurred on the acreages. The cash from BP will offset, at least partially, the $10 billion or so RIL is expected to invest in the US shale gas venture. RIL has committed nearly $1.5 billion in acquiring stakes in shale assets of Eagle Ford and Carrizo in the US. A new find in any domestic concession or higher returns from improved Andhra offshore volumes will make up the icing on the cake for RIL. But the real play of the partnership will be seen in LNG and retail marketing of gas. RIL has ambitions of expanding into the market for gas as automotive and piped kitchen fuels. Reliance Gas Transport Infrastructure Ltd, a company promoted by Ambani, has in place a major east-west pipeline and plans more such infrastructure. But domestic volumes are inadequate and BP can fill the gap by bringing in LNG from its overseas facility to feed the gas retail venture with RIL. The added volumes will improve utilization of RIL-Ambani’s gas infrastructure. Building an LNG import terminal may not be a priority, at least in the near term. There is enough spare capacity in existing import terminal on the west coast. With new ones proposed in south and east, this capacity will increase apace with demand. RIL-BP can import shipments through a tolling arrangement in the existing facilities. BP too appears to have got its maths right. While announcing the deal five months ago, its global head Robert Dudley had told reporters in London that BP was divesting assets at around $12 a barrel but buying into RIL’s acreages at $7-8 per barrel. With $8 billion cash in the fourth quarter, an acquisition with potential of 125,000 barrels per day of oil equivalent on staggered payment makes sense at this rate. On Friday, a company statement quoted Dudley as saying, “We welcome the Indian government’s approval for our alliance with Reliance Industries, partnering with India in its quest for energy security. This transaction is part of BP’s strategy of creating long-term value through alliances with strong national partners, taking material positions in significant hydrocarbon basins and increasing our exposure to growing energy markets. We will now work to complete the commercial agreements for the deal in the next few weeks.” BP is no stranger to India, having been around for long in the Indian lubricants market with its Castrol brand of products. It is the second-largest manufacturer of lubes in the country. There are other ventures in the oil sector such as the stake in an exploration acreage in RIL’s bouquet. It had in 2005 made an unsuccessful attempt to enter the oil refining and marketing business with state-run Hindustan Petroleum Corporation. In October 2005, BP had signed a letter of intent with HPCL for forming an equal joint venture for setting up a refinery and roll out a retail network. Then BP chief executive Lord John Browne had said the joint venture’s first major project would be building the $3-billion refinery with 9 million tonne capacity at Bhatinda in Punjab. But BP pulled out of the deal shortly thereafter. Before HPCL, BP had also been in talks with IndianOil Corporation for a stake in the Indian major’s proposed 15 million tonne refinery in Orissa and Bharat Petroleum’s 6 million tonne Bina refinery in Madhya Pradesh. But those talks too had failed since BP refused Indian companies access to any of its markets or stake in oilfields as part of the deal. BP’s overtures to flagship explorer Oil and Natural Gas Corporation too bore no fruit since it refused to give the Indian explorer share in its oilfields but insisted on operational control in Indian fields. The Indian companies had told BP that a partnership would be meaningful for them only if it came with access to BP's markets and oilfields. This was because the state-owned companies had enough cash of their own and were not looking at funding. Second, BP had no refining technology of its own and the Indian firms will anyway have to source it from elsewhere. The company is the leader in the solar power market through Tata-BP Solar, a joint venture with the Tatas. All these, however,pale in comparison to the deal with RIL.

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