RIL-BP deal will boost the confidence of foreign oil companies in the Indian oil and gas sector

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1 March 2011, Oil, Gas

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India's upstream sector has received a shot in the arm with the successful signing of an asset sale deal between Reliance Industries Limited (RIL) and BP, worth $7.2bn. The agreement allows the UK oil major to take a 30% stake in 23 oil and gas production-sharing contracts that RIL operates in India and to form a 50:50 joint venture (JV) with RIL for gas sourcing and marketing in India. The deal also envisages future investments amounting to $11bn by BP. This is a major part of BP's recovery strategy following the disaster in the Gulf of Mexico, while RIL hopes to generate funds for its strategic plans and gain access to BP's superior technologies.

The deal is being touted as one of the largest foreign direct investments in India, and is likely to play a vital role in the upcoming ninth round of its New Exploration Licensing Policy later this year. It allows RIL access to BP's world-class technical expertise, and is likely to enable the former to leverage its position to win a good number of oil and gas blocks. The deal is also likely to boost the confidence of other foreign oil and gas companies, encouraging them to invest in India's upstream sector.

With this deal, BP has completed its series of strategic investments in the BRIC countries (Brazil, Russia, India, and China) after reaching deals in Brazil, Russia, and China in 2010, countries which will see strong growth in energy demand. BP and RIL also plan to import liquefied natural gas (LNG) to India, with a target of achieving a considerable market share. The two companies are also considering a partnership in the unconventional oil and gas domain, with a focus on shale gas and coal bed methane blocks in the country. BP plans to develop a floating LNG terminal in India and leverage its vast LNG facilities in countries such as Australia, Indonesia, Egypt, Trinidad and Tobago, Angola, and Algeria.

The Krishna Godavari (KG)-D6 block along the east coast of India is the country's biggest gas-producing field. BP estimates that it holds about 15 trillion cubic feet of natural gas, mostly located in deeper waters, an industry in which the company, despite its Gulf of Mexico troubles, remains a world leader. Output from KG-D6 has slipped due to technical problems to about 52 million cubic meters a day (mcmd) from 60mcmd in 2010, and is thus short of the target output of 80mcmd. Through this deal, RIL can expect to ramp up its current oil and gas production from its fields by joining its technical expertise with that of BP. Datamonitor believes that the JV is likely to assist in increasing output from RIL's current producing blocks and allow the application of superior technology for the development of the company's other deepwater blocks.

The development will strengthen RIL's balance sheet through the addition of significant funds, enable the company to fulfill the commitments it has made for the supply of natural gas, and allow it to continue making strategic investments in assets including unconventional oil and gas resources. The gas sourcing and marketing JV between the two companies is particularly important for the country's midstream infrastructure, where RIL has investment plans. Datamonitor believes that the Indian upstream sector is likely to benefit through BP's operational and technological expertise, especially in deepwater oil and gas exploration. The deal is expected to boost the confidence of the international oil companies in the nation's upstream industry and attract future investments.

Source: Datamonitor

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