BP signs $7.2B deal with Reliance

The investment to explore for deep-water oil and gas is the second major one under BP's new chief executive, Bob Dudley.

By MSNMoney partner Feb 21, 2011 10:51AM

By Thompson Reuters

LONDON/NEW DELHI -- BP is making one of the biggest foreign direct investments in India to date with a $7.2 billion tie-up with Reliance Industries to explore for deep-water oil and gas.

This marks the second major deal under BP's new chief executive, Bob Dudley, who last month agreed a share swap with Russia's state-controlled Rosneft to jointly explore for offshore oil and gas in the Arctic.

BP said on Monday it will pay Reliance Industries $7.2 billion and performance payments of up to $1.8 billion if the tie-up leads to the development of commercial discoveries.

"This partnership combines the skills of both companies and will be focused on finding more hydrocarbons in the deep water blocks of India," Mukesh Ambani, Chairman and Managing Director of Reliance Industries, said in a statement.

BP is recovering from last year's disastrous Gulf of Mexico spill which cost it billions of dollars and former CEO Tony Hayward his job.

"It's kind of similar to the Russian deal - it's getting access to longer term positions which could be material....But we've got a key risk here. The gas price is regulated, it's not rising as quickly as people expected," Oswald Clint from Sanford Bernstein said.

BP will take a 30 percent stake in 23 oil and gas blocks and form a 50:50 joint venture with Reliance for the sourcing and marketing of gas, the companies said.

"This partnership meets BP's strategy of forming alliances with strong national partners, taking material positions in significant hydrocarbon basins and increasing our exposure to growing energy markets," BP Chairman Carl-Henric Svanberg said.

The companies said the future performance payments and the combined investment could amount to $20 billion in total.

The market welcomed the deal, with analysts highlighting the importance of the tie-up as a sign of investor confidence in India and the country's oil potential.

BP's shares were up 0.1 percent at 494.4 pence at 1216 GMT following the news. Reliance Industries shares had already closed 2 percent higher before the announcement, but were expected to gain when they reopened on Tuesday.

"It is a big positive in terms of getting foreign direct investment into India. It shows the confidence in India at large and its oil and gas potential," Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher in Mumbai said, adding others could follow BP's lead.

The move is a vote of confidence for India's energy sector, which has struggled to attract investment due to regulatory uncertainty. A $9.6 billion bid for control of Cairn Energy's Indian assets by Vedanta Resources, has been waiting six months for government approval as royalty payments are hammered out with state-run partner ONGC.

BP already has a presence in India, including an interest in a deepwater block called D-17, which it has been working on with Reliance Industries since late 2008.

The Indian group is controlled by billionaire Ambani, who is the world's fourth-richest man, according to last year's Forbes magazine rich list.

The company's key production asset is its KG D6 block in the Krishna-Godavari basin off India's east coast. Its output is around 52-53 million cubic metres of gas a day and it could reach peak capacity of 80 million cubic metres in 2013.

Mukesh Ambani and his brother Anil split their late father's business empire in 2005, and were locked in a public feud before a truce last year, when they reached agreement over disputed gas supply contracts from Reliance Industries to a company controlled by Anil Ambani.

Reliance Industries runs the world's biggest refining complex at Jamnagar with two plants of combined capacity of some 1.24 million barrels per day. It has also been buying up shale gas assets in the United States and has interests in petrochemicals and retail, and is now looking at diversifying.

It bought telecoms business Infotel Broadband in a $1 billion deal in 2010. In August 2010, Reliance acquired a stake in hotel chain EIH Ltd, which runs the luxury Oberoi and Trident hotels.

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