The government on Friday gave unconditional approval to Reliance Industries’ (RIL’s) proposal to sell 30 per cent interest in 21 oil and gas blocks to BP. It withheld permission for two blocks. The two companies had announced on February 21 that BP would pay $7.2 billion to RIL for the deal.
The approval was given by the Cabinet Committee on Economic Affairs (CCEA), headed by Prime Minister Manmohan Singh, though Petroleum Minister S Jaipal Reddy admitted the deal did not need to go to CCEA. “Since the deal was huge, we felt it was better to get it approved by CCEA,” he said.
This is one of the biggest foreign direct investments into the country. “It will not only mean an investment of $7.2 billion by a foreign company but will also lead to induction of technological expertise,” Reddy said. Besides the $7.2-billion upfront payment, BP will invest about $13 billion in the blocks.
| DONE DEAL |
| BP TO PAY $7.2 billion to RIL for 30% interest in 23 blocks
BP WILL also make about $13-billion investment in the blocks TWO COMPANIES to float a joint venture for the LNG business RIL announced the deal on February 21. GOVT HAS given approval for 21 blocks |
APPROVAL FOR two blocks withheld as the first phase of exploration is over and an extension is not in place yet
RIL’s D6 field doubled India’s gas production when it started producing 60 mmscmd gas in March 2009
IT STARTED production in April 2009, making India a bigger gas producer than a crude oil producer
DHIRUBHAI 6 (D6) IS the name of the KG-DWN-98/3 block given to RIL in the first round of bidding under the New Exploration and Licensing Policy
THE PRODUCTION from D6 includes that from the MA field, which has stagnated around 50 mmscmd, forcing the government to order supply cuts in April this year
Asked why permission for two blocks had been held back, Reddy said the first phase of exploration for the non-producing blocks was over and RIL could not sell interest in something on which it did not have any right. The petroleum ministry was recently criticised by the Comptroller and Auditor General for giving extensions to private exploration companies such as RIL and Cairn India.
In anticipation of the approval, the RIL stock closed marginally higher at Rs 873 on the Bombay Stock Exchange. But analysts say real gains will come only if the company increases gas production. “The deal will flood RIL with $7.2 billion cash, but for the scrip to break out of the price band of Rs 850-950, the company will have to increase gas production,” said Jagannadham Thunuguntla, head of research, SMC Global Securities.
Oil and gas production from Dhirubhai-1 and -3 and MA fields in the KG-D6 block has been falling. The block is producing 46.8 million metric standard cubic metres per day (mmscmd) as against 61.5 mmscmd in March last year. The production should have been 70 mmscmd by now.
When asked about falling production from the KG D6 block, Reddy said the consortium would do its best to ramp up production. “It (the consortium) needs no instruction. It is its duty.”
Lower gas production had forced the government to order cuts in supply to steel and refining companies, including RIL itself, in April.
Thunuguntla said RIL, which had $4-5 billion cash, needed to invest the money. “For the past few years, RIL has not made any major investment. The market view is that the company is running out of ideas for investment.”
Though the deal is being executed through BP Exploration (Alpha) Ltd, the government has asked BP to furnish bank and performance guarantees as prescribed in the production sharing contracts. “We will now complete the commercial agreements with Reliance and move forward with this exciting venture,” said Bob Dudley, BP group chief executive.
RIL is the operator of all the 23 blocks. Canada’s Niko Resources and UK’s Hardy Oil have 10 per cent interest in some of these blocks. After the BP deal, RIL’s holding will come down to 60-70 per cent. However, if its partners decide to exercise pre-emptive rights, its interest will fall further.
RIL’s second-biggest discovery block is NEC-25 in the Mahanadi basis off the Orissa coast in which Niko holds a 10 per cent interest.
Besides exploration, Reliance and BP will form an equal joint venture for sourcing and marketing gas in India. The venture will create infrastructure for receiving, transporting and marketing natural gas in the country.
