Digging Deeper: BP-Reliance Partnership
The need for involvement of foreign players in India’s oil and gas exploration sector is acutely felt. Most global oil giants are reluctant to commit big capital in India due to government control. This may change if the BP-Reliance relationship works out fine, writes Siddharth Srivastava.
(Above): Mukesh Ambani, chairman and managing director of Reliance Industries Limited (l) seen here with Robert (Bob) Dudley, BP group chief executive. BP recently acquired a 30% stake in oil and gas blocks of Reliance Industries Limited.
In the biggest foreign direct investment (FDI) into India, BP, the world’s fourth-largest energy company, has been cleared to invest U.S. $7.2 billion to acquire 30% stake in oil and gas blocks of Reliance Industries Limited that includes the rich D6 in the eastern Krishna Godavari Basin and 20 more blocks.
Earlier this month BP said that it is confident of raising output in the next couple of year. BPs CEO Bob Dudley has said that his company is looking for a long and successful working partnership with Reliance.
BP India head Sashi Mukundan said that D6 block off the Andhra coast has immense potential. “We are studying the data. We are confident that there is more gas and output can be raised. But these things take time; it may take a couple of years,” he said.
Demand for gas in India is growing fast due to household consumption and industry, automobiles, power producers and fertilizer firms.
BP-Reliance Strategy. Over the last couple of weeks the contours of a joint BP-Reliance strategy to boost oil and gas output were being worked out, following government approval.
It has emerged that BP will focus on the technical aspects of enhancing gas output, while Reliance will lobby the government to raise gas prices that are considered too low at U.S. $4.2 per million British thermal units and are scheduled for revision only in April 2014. Reliance will try to impress the government to pre-pone this date.
The price factor becomes important as BP is expected to deploy more expensive drilling techniques in the main gas bearing areas of Krishna Godavari-D6 given the problems that Reliance has faced to raise the gas output, a spokesperson of Reliance said recently.
(Above): Mukesh Ambani, chairman and managing director of Reliance Industries Limited (l) seen here with Robert (Bob) Dudley, BP group chief executive at the press conference to announce the deal in London.
Both, BP and BG, another major looking to invest in India, have recently expressed the need to free government control over gas prices so that investors are able to ensure returns on their large investments and the associated risk factor.
Reliance and BP meanwhile are expected to develop more aggressively the R-Series discoveries and other satellite fields in the Krishna Godavari-D6 block that can enhance output of gas by a big 35 million cubic meters a day.
Thus, the investment expenditure of U.S. $9 billion on the Krishna Godavari-D6 block that has been approved by New Delhi is expected to be completely utilized. Reliance has already utilized more than half this amount.
KG Problems. Indeed, all is not well with RIL’s mainstay KG-D6 block. The company has been pulled up by upstream regulator Directorate General of Hydrocarbons (DGH) for not meeting its gas output commitments. Several consumers have been forced to shift to imported-LNG that costs three times the officially fixed Reliance gas price.
DGH has warned that Reliance will not be able to touch peak output of 80 mmscmd by April 2012 and has asked Reliance to drill more wells to meet the commitments as per the field development plans submitted.
(Above): Mukesh Ambani talks to the press.
Reliance gas output has fallen to 44 million cubic meters a day as technical issues hamper development. The company has warned that the gas output could further drop “unless radical changes were implemented at the block.”
Observers have attributed multiple reasons for RIL’s failure to meet its target. One possibility is that the KG-D6 gas is present in isolated pools making it difficult to produce the full volume as costs of drilling more wells outweigh production revenues.
According to Avinash Chandra, a former head of DGH, KG-D6 field involves complex issues. “D6 reservoirs are highly complex and heterogeneous. The thicker sand bodies have very high permeability.” Analysts have also said that Reliance could be aiming to lower rate of gas production to cut down “water coning” problem in the wells.
Hopes High. The need for involvement of foreign players in India’s exploration sector is acutely felt to tackle some of the tough technical aspects, especially deepwater drilling at KG.
BP has considerable experience is dealing with the kind of problems that Reliance is facing at KG-D6 and is expected to lay down drilling and development plans, strategies and technical requirements.
BP will enable RIL India to tap full potential of its gas reserves, chairman of RIL, Mukesh Ambani said. The BP-RIL venture will also set a precedent for future foreign investments into India’s hydrocarbon sector.
Earlier this month BG India said that it wants to invest in one of the state explorer, ONGC’s blocks in the KG basin adjacent to RIL’s prolific D6 block. Most global oil majors have so far been reluctant to commit big capital in India due to government control over the sector, especially pricing.
This may change if the BP-Reliance relationship works out fine.