BP Plc (BP) and Reliance Industries Ltd. have joined hands for a deepwater oil and gas exploration program in India. The $7.2 billion deal highlights BP’s endeavor to compensate for last year’s Gulf of Mexico oil spill by focusing on the world’s fastest growing energy market.
The British oil giant will acquire a 30% stake in 23 oil and gas blocks operated by Reliance. BP will also shell out $1.8 billion more if the companies discover more hydrocarbon than they expect.
The two companies will also enter a 50:50 joint venture agreement for sourcing and marketing of gas across India. Development of assets could cost BP $20 billion in due course, making this India’s biggest foreign direct investment so far.
The oil and natural gas assets, mostly off India’s East Coast, cover around 104,247 square miles. Under the production sharing contracts between the two companies, Reliance will hold its operatorship of the blocks, which have a production capacity of about 1.8 billion cubic feet of gas per day, equivalent to over 30% of India’s total consumption.
BP is already engaged in a $30 billion asset disposal program to raise funds for the spill-related recovery. We see the BP-Reliance agreement as yet another step in battling the aftermath. In the wake of rising global oil demand, the U.K. oil major should benefit from this long-term, strategic alliance with the world’s faster-growing economies.
As per BP’s Energy Outlook 2030, India’s energy consumption has shot up 190% over the last 20 years. The momentum is expected to continue with 115% growth estimated over the next 20 years.
This agreement marks BP’s second largest deal following a share-swap agreement in January with Russia’s state-operated oil company, Rosneft, for jointly exploring and developing prospective areas of the Siberian Arctic belt.
According to the United States Energy Information Administration, Russia has a reserve potential of 1,680 trillion cubic feet natural gas and 60 billion barrels of oil, as compared with India’s 8.8 billion barrels of oil and 50.7 trillion cubic feet of gas reserves as estimated by the Indian government.
The most recent tie-up is expected to prove positive for BP, which is strengthening its foothold in growing energy markets, while reducing its dependence on the Gulf of Mexico. The BP-Reliance deal, pending approval of the Indian government, is expected to close later in 2011.
Management remains positive on the company’s growth profile and looks forward to marked recovery as well as consolidation to reduce operational risk or oil spill-related assignments. We see a slow but gradual economic recovery, deepening focus on upstream exposures through the trimming of downstream operations and increases in oil prices as beneficial for BP.
However, we also see near-term headwinds with respect to weak U.S. refining margins and competitive disadvantages versus its European peers, such as Royal Dutch Shell plc (RDS.A).
Consequently, we retain our long-term “Neutral” recommendation on the company. BP holds a Zacks #3 Rank (short-term ‘Hold’ rating).
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