Cabinet approves $7.2 bn Reliance-BP deal

New Delhi: After a waiting period of nearly five months, the Cabinet Committee on Economic Affairs (CCEA), headed by Prime Minister Manmohan Singh today cleared UK’s BP  buying 30 percent stake in most of Reliance Industries’ oil and gas blocks, including the showpiece KG-D6 gas fields, for$7.2 billion. The deal, that may increase to $20 billion with future performance payments and investment, will give Reliance access to BP’s expertise in deep-water drilling and accelerate development and production at its fields particularly the under-performing eastern offshore KG-D6. [caption id=“attachment_46561” align=“alignleft” width=“380” caption=“Britain’s Chancellor Osborne, with Chairman and Managing Director of Reliance Industries Mukesh Ambani. AFP”] [/caption] Reliance Industries, had on 21 February agreed to sell 30 percent stake in 23 out of its 29 oil and gas blocks to London-based BP Plc for $7.2 billion, and may get an additional $1.8 billion if the two explorers find more hydrocarbons. The CCEA approved stake sale of only 21 blocks as exploration status in the two remaining blocks was in dispute. BP will have to furnish a bank guarantee and performance guarantee as has been prescribed under the production sharing contract. For BP, which has been struggling to battle back from the disastrous Gulf of Mexico oil-spill disaster last year, the transaction is a chance to enter a market where energy demand is growing at 5-8 per cent. The BP deal is a clear breakthrough for Mukesh Ambani in terms of getting access to BP’s expertise as well as de-risking its exploration and production (E&P) portfolio. Reliance and BP will also form a 50:50 joint venture for the sourcing and marketing of gas in India. The JV will also work towards creation of infrastructure for receiving, transporting and marketing of natural gas in India which could be in the form of an LNG terminal. Officials said Reliance had on 25 February  applied for government approval for the stake sale. New Exploration Licencing Policy, under which Reliance had won the oil and gas blocks, allowed for sale or assignment of participating interest (farm-out), which is routinely approved by the oil ministry.  But the ministry, even though competent to approve the deal, decided to refer it to the CCEA. Reliance may use BP’s deepwater expertise to tackle the technical issues in the sub-surface of KG-D6 block.Dhirubhai-1 and -3 gas fields in the KG-D6 block have seen output falling to 39 million cubic meters per day from 50 mmscmd achieved in March last year. Reliance has been forced to restrict oil production from the MA field, in the same area, to about 15,000 barrels per day due to high water and gas cut. Together with 8 mmscmd of gas produced from MA field, KG-D6 block in the week ended 10 July produced 46.8 mmscmd as against 61.5 msmcmd in March last year. As per projections, the output should have risen to 69 mmscmd by now. Besides addressing the reservoir issues in KG-D6, BP is expected to help Reliance quickly put into production 9 satellite gas discoveries, for which Reliance has been struggling to piece together a viable development plan. While tEurope’s second biggest oil firm will pay  $7.2 billion in three tranches in FY12, some analysts said Reliance will not be liable to any income tax on the receipts. The $7.2 billion deal is seen as the biggest FDI into India. Other proposed big transaction — Posco’s $12-billion investment announced years ago for a steel plant in Orissa —is yet to take off. Reliance is the operator in all the 23 blocks while Canadian Niko Resources and UK’s Hardy Oil have minority 10 percent interest in a few. After the deal, Reliance holding in the blocks will come down to 60-70 percent. 19 out of 23 blocks lie off the east coast while two blocks are onland in Assam and Gujarat. PTI