Reliance to close USD 7.2 bn BP deal this month

With the government formally communicating its approval for sale of 30 per cent stake in the 21 blocks, the closing documents are likely to be signed before month-end, sources in know of the development said.

BP, which had in the June quarter paid first installment of USD 2 billion, will make payments of the next tranche at the close of the deal. The complete USD 7.2 billion amount was originally envisaged to be paid in three installments.

Sources said 25-30 experts from BP will arrive next month to begin jointly working with RIL on its assets particularly the showpiece eastern offshore KG-D6 block, where production has fallen from 61 million standard cubic meters per day to about 46 mmscmd instead of rising to the planned nearly 70 mmscmd.

While RIL will continue its role as an operator of the blocks, BP will focus on enhancing subsurface understanding. An overarching technical committee will set up that will ensure the blocks are explored in the right way and developed to the highest standards, they said.

Although the Cabinet Committee on Economic Affairs had on July 22 cleared the sale of stake by RIL to BP in 21 blocks, including producing block KG-D6 and discovery area NEC-25, a formal communication was sent to RIL/BP only on August 8.

Sources said RIL has already submitted amendments to the Production Sharing Contract (PSC) that needs to be done to induct BP as 30 per cent partner, to the oil regulator DGH and the petroleum ministry. Once they are approved by them, the amended PSCs may be signed in 4-6 weeks time.

RIL may hold a big show at the signing and may invite top government functionaries, including the Prime Minister Manmohan Singh to witness inking of the transformational deal.

BP will furnish a bank guarantee and performance guarantee before signing the PSC.
The deal, which might increase in value to USD 20 billion on the basis of future performance payments and investment, will give RIL access to BP's expertise in deepwater drilling and accelerate development and production from its fields, particularly the under-performing KG-D6 block.

For BP, which has been struggling to recover from the disastrous Gulf of Mexico oil spill last year, the transaction is a chance to enter a market where energy demand is growing at 5-8 per cent.

The first task of the RIL-BP joint technical team would be to optimise natural gas recovery from the KG-D6 block.

Sources said the alliance will also examine importing gas to India as also accelerate development infrastructure to receive and transport gas across the country.

RIL had on February 21 agreed to sell a 30 per cent stake in 23 out of its 29 oil and gas blocks to London-based BP for USD 7.2 billion. It may get an additional USD 1.8 billion if the two explorers find more hydrocarbons.

But the government has approved stake transfer only in 21 blocks. Approval for two inconsequential blocks -- one a deep sea area off the Orissa coast and the other an onland block in Assam -- was held back over technical issues.

Sources said RIL plans to use BP's deepwater expertise to tackle the technical issues in the KG-D6 block.

The Dhirubhai-1 and 3 gas fields in the KG-D6 block have seen output fall to 38.4 mmscmd from 53 mmscmd in March last year. Reliance has been forced to restrict oil production from the MA field, in the same area, to 14,500 barrels per day due to high water and gas cut.

Together with 7.6 mmscmd of gas produced from the MA field, the KG-D6 block produced 46 mmscmd as against 61.5 msmcmd in March last year. As per projections, the output should have risen to about 70 mmscmd by now.

Approval for the sale of 30 per cent interest in deepwater block NEC-DWN-2002/1 in the Bay of Bengal and Assam onland block AS-ONN-2000/1 would be decided later as oil regulator DGH and RIL were in disagreement over the status of exploration in the two acreages, sources said.

Besides addressing the reservoir issues in KG-D6, BP is expected to help RIL quickly put into production nine satellite gas discoveries, for which the Mukesh Ambani firm has been struggling to piece together a viable development plan.

RIL is the operator in all 23 blocks, while Canadian firm Niko Resources and UK's Hardy Oil have minority 10 per cent interest in a few. After the deal, RIL's holding in the blocks will come down to 60-70 per cent. 19 out of the 23 blocks lie off the East Coast, while two blocks are in Assam and Gujarat.

Niko has 10 per cent interest in the KG-D6 block and after the BP deal, RIL's stake would fall to 60 per cent.

Besides KG-D6, RIL's second biggest discovery block is NEC-25, off the Orissa coast. It has so far made 15 exploratory successes in the block, where Niko holds a 10 per cent stake. Following the BP deal, RIL's stake in this block will fall to 60 per cent.

KG-D3 block may hold potential gas resources of 9.5 tcf. Hardy has 10 per cent stake in the block and RIL 90 per cent.

RIL has also made oil discoveries in a Cambay onland block.
RIL and BP will also form a 50:50 joint venture for the sourcing and marketing of gas in India. The JV will also work toward creation of infrastructure for receiving, transporting and marketing of natural gas in India, which could be in the form of an LNG terminal.