Reliance - BP Deal

(RTTNews) - The Indian cabinet on Friday approved a $7.2 billion deal between Reliance Industries Ltd. and British oil giant BP plc (BP, BP_UN.TO, BP.L). The cabinet approved Reliance's sale of a 30 percent stake in 21 oil and gas blocks to BP, instead of the 23 blocks originally planned under a deal announced by the two companies in February.

The Cabinet Committee on Economic Affairs has excluded the two remaining blocks due to some technical issues. The deal was earlier recommended for approval by India's oil ministry.

BP said in February that it would acquire interests in Reliance's oil and gas blocks for a total consideration of $7.2 billion plus completion adjustments. The oil and gas blocks include the producing eastern offshore Krishna Godavari basin KG-D6 fields, India's biggest gas deposit. The deal is the single largest foreign direct investment in India.

BP will also form a 50:50 joint venture with Reliance to source and market gas in India. In addition, the joint venture will endeavor to accelerate the creation of infrastructure for receiving, transporting and marketing natural gas in India.

BP said it would pay up to $1.8 billion in future performance payments, based on exploration success. These payments and combined investment could amount to $20 billion.

Reliance's 23 oil and gas blocks together cover about 270 thousand square kilometers, making the partnership India's largest private sector holder of exploration acreage. Under the deal, Reliance will continue to operate the production sharing contracts, which currently produce about 1.8 billion cubic feet of gas per day. This is over 30 percent of total consumption, and over 40 percent of the total production of India.

The deal will enable Reliance gain access to BP's expertise in deep-water exploration. Reliance was facing sub-surface technical problems at its eastern offshore KG-D6 fields, where production declined to around 48 million cubic meters or mmscmd per day from 61.5 mmscmd per day, instead of increasing to the planned 69 mmscmd. Reliance hopes BP will help fix the reservoir issues and quickly increase the output to the peak of 80 mmscmd.

Meanwhile, the deal enables BP to enter a market where energy demand is growing at a fast pace. According to BP, energy consumption in India is likely to grow by 115 percent over the next 20 years, a rate of over 4 percent per annum. It is expected that gas would be the fastest growing fossil fuel, with demand growing at a rate of nearly 5 percent a year between 2010 and 2030.

In Friday's trading, BP is trading at $46.05, up $0.01 or 0.02 percent on a volume of 0.54 million shares.

Shares of Reliance Industries closed Friday's trading on the Bombay stock exchange at 873.60 rupees, up 12.85 rupees or 1.49 percent on a volume of 423 thousand shares.