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Home Min clears RIL's sale stake in oil & gas blocks to BP

Clearing the last hurdle, the Home Ministry has given unconditional approval for UK's BP to buy a 30% stake in Reliance Industries' oil and gas blocks, including the showcase KG-D6 gas fields, for USD 7.2 billion.

June 16, 2011 / 12:38 PM IST
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Clearing the last hurdle, the Home Ministry has given unconditional approval for UK's BP to buy a 30% stake in Reliance Industries' oil and gas blocks, including the showcase KG-D6 gas fields, for USD 7.2 billion.

The Ministry of Home Affairs wrote a one-page letter to the Petroleum Ministry on June 1 giving security clearance and a no-objection certificate for BP buying a 30% stake in 23 oil and gas blocks of Reliance in India's largest foreign direct investment, a top Oil Ministry official said.

While the NOC to the Reliance-BP deal is unconditional, the Home Ministry asked if Reliance could not have offered the stake to state-owned gas utility GAIL India or any other PSU.

"Our PSUs do not have the expertise Reliance has been looking for. It wanted an expert in deepsea technology and GAIL, which is a gas marketing and transportation company, hardly fits the description," he said.

Reliance wants to leverage the worldwide experience of Europe's second biggest energy company to resolve sub-surface technical issues at its KG-D6 gas fields, where production has fallen from 61.5 million standard cubic metres per day to about 48 mmscmd, instead of rising to the planned 69 mmscmd.

The Mukesh Ambani-led firm hopes BP would be able to fix reservoir issues at the Dhirubhai-1 and three gas fields in the KG-D6 block to rapidly raise output to the planned peak of 80 mmscmd and also help in formulating viable plans to bring to production other finds in the block and in other areas.

Industry observers scoffed at the idea of Reliance first offering the stake to firms like GAIL and asked whether the Home Ministry would suggest the same to Cairn Energy, which is selling its Indian unit to London-listed mining group Vedanta Resources.

State-owned Oil and Natural Gas Corp (ONGC) is already a 30% partner in Cairn India's mainstay Rajasthan block and could easily takeover Cairn Energy shares.

They questioned the Oil Ministry's rationale of seeking security clearance for BP when the company is already operating oil and gas blocks in the country, has a huge lubricant business and a flourishing solar venture with Tata.

ONGC, the nation's largest state explorer, is in fact struggling to put together a viable development plan for discoveries it has made in a block adjacent to KG-D6 in the Krishna-Godavari basin. ONGC itself has been seeking partners
for that block and had shortlisted BP as a potential ally.

The official said the Home Ministry has also asked if oil and gas can be exported. "That is ridiculous to even think. Production Sharing Contract (PSC) bars export of oil and the Supreme Court has upheld the government's absolute powers to decide users of natural gas. So while India is energy deficit, no government can even think of exporting gas."

"There is no way that BP can take oil and gas produced from Reliance blocks to the UK," he added. Europe's second biggest oil company, BP will pay USD 7.2 billion for a 30% stake in 23 out of 26 exploration blocks held by Reliance and a performance payment of up to USD 1.8 billion if the tie-up leads to the development of commercial discoveries.

Reliance and BP will also form an equal joint venture for the import, marketing and transportation of natural gas.

After the NOC from the Home Ministry, the Petroleum Ministry will accord in-principle approval to the transaction, after which amendments to the production Sharing Contracts (PSCs) of the 23 blocks would be effected to induct BP as a partner.

Reliance will retain operatorship of all 23 blocks.

"The BP-Reliance move to form a joint venture for transporting and marketing natural gas in India is widely expected to spell trouble for public sector gas major GAIL," the Home Ministry's June 1 letter said.

Stating that GAIL, ONGC and Oil India had to foot Rs 25,200 crore out of the Rs 75,600 crore retailers lost on selling fuel below cost, it said, "Oil PSUs' share in the marketing of natural gas would take a big hit if the BP-Reliance duo enters the segment in a big way, which it is expected to do so."

"30% stake in Reliance's gas and oil assets could have been offered to GAIL or any other PSU which could have raised the USD 7.2 billion as a consortium," it added.

Also, the ministry said it needs to be "ascertained whether the New Exploration Licensing Policy (NELP) agreement/contract under which Reliance bought the oil wells had a provision for the sale of assets and whether the Reliance-BP deal would enable BP to sell/transport gas outside the country."

The Oil Ministry official said NELP provides for farm-outs or stake sales and Reliance's agreement with BP was in perfect conformity with that.

The USD 7.2 billion Reliance-BP deal is seen as the biggest FDI into India. A much larger proposed transaction -- Posco's USD 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% interest in a few. After the deal, Reliance' holding in the blocks will come down to 60-70%. Nineteen out of 23 blocks lie off the East Coast, while two blocks are onland, in Assam and Gujarat.

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