LONDON/NEW DELHI (Reuters) - BP lined up one of the biggest foreign direct investments in India to date with a $7.2 billion tie-up with the country’s Reliance Industries to explore for deepwater 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 the Arctic for offshore oil and gas.
BP said on Monday it would 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.
“BP is the best finder of hydrocarbons in deepwater in the world,” Mukesh Ambani, Chairman and Managing Director of Reliance Industries, said at a press conference.
BP wants to put last year’s Gulf of Mexico oil spill disaster behind it, and said earlier this month it would look for long term growth through a fresh focus on discovering oil and gas via exploration partnerships.
The oil spill prompted a $30 billion asset disposal program to help cover BP’s costs. But Dudley said BP still had plenty of cash to fund the investment in Reliance assets at a price equivalent to $7.50 per barrel.
“We’ve been divesting assets at around $12 per barrel so for us this is a sensible transaction,” Dudley said.
BP will take a 30 percent stake in 23 oil and gas blocks and form a 50:50 joint venture for sourcing and marketing gas.
“It’s kind of similar to the Russian deal - it’s getting access to longer term positions which could be material,” Oswald Clint from Sanford Bernstein said. “But we’ve got a key risk here. The gas price is regulated, it’s not rising as quickly as people expected,”
Dudley shrugged off concerns about the gas price and said the deal would help BP gain from rising energy demand in India.
“The whole world’s looking for gas, particularly in Asia... we believe it is going to be a very, very valuable fuel,” he said, adding that the blocks involved had indicated resources of around 15 trillion cubic feet.
The companies said the future performance payments and the combined investment could amount to $20 billion in total.
The market welcomed the deal as a sign of confidence in India and the country’s oil potential.
BP’s shares closed 0.3 percent lower at 495.2 pence.
Reliance Industries shares, which had closed 2 percent higher before the announcement, 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.
India is on track in the fiscal year ending in March to attract $27.6 billion in foreign direct investment, down from $35.6 billion the previous year, a senior official said.
Last month, India approved a $12 billion steel mill project by South Korea’s POSCO after years of delay, giving clearance to its largest foreign direct investment. The biggest completed FDI deal to date was Vodafone’s $11.1 billion deal in 2007 for control of a cellular carrier, in 2007.
India’s energy sector 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 waited six months for a government nod as royalty payments are hammered out with state-run partner ONGC.
Reliance’s tie-up with BP is also subject to government approval, although Ambani said he expected to get the greenlight from the authorities “soon”.
Once the deal is approved, BP will pay the $7.2 billion to Reliance in stages up until March 2012, Dudley said.
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.
When asked if BP had plans to buy a stake in Reliance Industries, Dudley said the company was happy with the partnership and that would be the focus of its future efforts.
The powerful Indian group is controlled by billionaire Ambani, who is the world’s fourth-richest man, according to last year’s Forbes magazine rich list.
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. 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 and in August 2010, it bought a stake in hotel chain EIH Ltd, which runs the luxury Oberoi and Trident hotels.
Additional reporting by Aditya Phatak, Jui Chakravorty and the MUMBAI bureau and Alex Lawler in LONDON; Writing by Alexander Smith; Editing by Erica Billingham and Jane Merriman