3 years

Energy

Pushed Together: RIL and BP

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BP is believed to have the technical expertise that RIL needs to ramp up gas output

‘Historic’ and ‘transformational’ is how the new partnership between Reliance Industries Ltd (RIL) and the UK-based energy major BP is described by Mukesh Ambani and Robert Dudley, the bosses of RIL and BP, respectively. The first part of this strategic alliance, focused on finding more oil and gas in India, sees BP buying a 30 per cent stake in 23 hydrocarbon blocs that RIL operates in India. For this, BP pays RIL $9 billion. The second part, which could involve $11 billion in additional investment, would be a 50:50 joint venture to source and sell natural gas in the country, for which an entire gas pipeline network will need to be laid.

For a country that imports more than 70 per cent of its energy, it could well be a big deal indeed. “This partnership, besides being the single largest foreign direct investment in the history of India,” Ambani has said, “also has huge significance for securing the energy resources needed to help fuel India’s economic growth and prosperity of its people.” Analysts share the optimism. After India opened up its oil and gas exploration sector in 1999, “none of the major energy companies had shown any interest in India”, says Arvind Mahajan, head of natural resources at the consultancy KPMG. “BP’s coming to India sends a strong message,” he adds, “about exploration prospects in India.” Moreover, since RIL remains in control of the blocs, he feels the Government should welcome the deal as a way to reverse the decline in perceptions of India as a good investment destination.

It is, of course, a private deal. While RIL has some terrific oil and gas blocs, it has lacked the high-end technology needed to exploit them to the fullest. This was evident in its failure to raise gas output from its D-6 bloc in the KG basin off Andhra’s coast; the reservoir bears a geological complexity that obstructs the natural flow of gas, and BP is believed to have just the right technical expertise to solve the problem. Plus, of course, dig into other reservoirs that RIL has. Exploration is a high-risk business, and the alliance helps spread the risk.

On its part, BP, which has been reeling from its Gulf of Mexico oil spill crisis, is keen on hydrocarbon prospects in places where few Western firms have ventured. It has struck a partnership with Russia’s state-run Rosneft, acquiring a 9.5 per cent stake in it, a deal done with help from Vladimir Putin—to explore the Arctic. BP’s Indian venture is a lot less subject to geopolitical risk, say global analysts, especially since Russia’s internal tussles are becoming a bother for it there. With the stability of an Indian deal, and that too with a firm that has been ‘extraordinarily lucky’ with its bloc acquisitions, BP can now reassure its investors that it is not just busy selling assets to pay for the oil spill, but forging a new future for the company by acquiring new assets in “emerging markets where most of the world’s growth in energy demand is coming from”, in Dudley’s words.