The Cabinet Committee on Economic Affairs (CCEA) today approved the $7.2 billion Reliance Industries - BP deal. The decision was taken in a meeting chaired by Prime Minister Manmohan Singh.
“The CCEA has given approval for a stake in 21 of the 23 blocks. For technical reasons we did not approve two other blocks,” Petroleum Minister Jaipal Reddy said. The remaining two blocks are inconsequential which means that the non-approval for these two blocks will have no impact on the deal.
Some conditions, already a part of the production sharing contracts (PSC), have been reiterated by the CCEA. "We are proposing to enforce all provisions of PSC...Will give approval after parent company gives financial guarantee," Mr Reddy said. Also watch (Jaipal Reddy on nod to RIL-BP deal)
Accordingly, the alliance would not be able to export any gas from these 23 blocks and the pricing and allocation power would be with the government.
CCEA's approval comes on the back of a nod to the deal by the Home, Finance and Petroleum Ministry. The deal between Europe's second-largest oil company BP Plc. and India's biggest private sector firm Reliance Industries Limited (RIL) was signed in February 2011. BP plans to buy 30 per cent stake in 23 oil and gas blocks of Reliance Industries, including the eastern offshore Krishna Godavari basin KG-D6 fields.
Over the past few months, Reliance has been under pressure because of falling production in its flagship KG-D6 reservoir. Reliance's output at KG-D6 has fallen from 61.5 million standard cubic meters per day (in March 2010) to less than 48 mmscmd currently due to reservoir problems. It is pinning hopes on BP for reviving sagging output which according to plans should have touched 69 mmscmd by now.
Analysts pointed that if the falling production is linked to technical difficulties, BP's association will be a significant boost in ramping up production. Sushil Choksey, MD of Rosy Blue Securities said, "The entire underperformance over the last 6-8 months was because of gas production... All other divisions of the company are doing well. Reliance wants superior technology because it is not able to manage the current situation with KG-D6 basin."
CCEA's approval comes on the back of a nod to the deal by the Home, Finance and Petroleum Ministry. The deal between Europe's second-largest oil company BP Plc. and India's biggest private sector firm Reliance Industries Limited (RIL) was signed in February 2011. BP plans to buy 30 per cent stake in 23 oil and gas blocks of Reliance Industries, including the eastern offshore Krishna Godavari basin KG-D6 fields.
Over the past few months, Reliance has been under pressure because of falling production in its flagship KG-D6 reservoir. Reliance's output at KG-D6 has fallen from 61.5 million standard cubic meters per day (in March 2010) to less than 48 mmscmd currently due to reservoir problems. It is pinning hopes on BP for reviving sagging output which according to plans should have touched 69 mmscmd by now.
Analysts pointed that if the falling production is linked to technical difficulties, BP's association will be a significant boost in ramping up production. Sushil Choksey, MD of Rosy Blue Securities said, "The entire underperformance over the last 6-8 months was because of gas production... All other divisions of the company are doing well. Reliance wants superior technology because it is not able to manage the current situation with KG-D6 basin."
However, there have been reports that the problem might be with the reservoir and in that case BP's association might not be effective.
Reliance will get an upfront payment of $7 billion while another $1.8 billion is linked to exploration success. The extra cash would help Reliance become a debt free company as announced by Chairman Dhirubhai Ambani during the annual results. However, that is unlikely to give any momentum to the stock, which is trading at two -year lows.
Jagannathan Thunuguntla of SMC Global said, "I don't think there will be any impact on the stock. If RIL becomes debt free, that will reduce the return on equity... Extra cash has been a drag on the stock... It suggests that company is running out of ideas where to invest money."
Earlier, the deal got delayed because the Directorate General of Hydrocarbons (DGH) had been studying all the PSC involving 23 oil and gas blocks that need to be modified to include RIL’s new partner BP. The DGH is the technical arm of the Petroleum Ministry.
Reliance is the operator in all the 23 blocks, while Canadian Niko Resources and UK's Hardy Oil have minority 10 per cent interest in a few. After the deal, Reliance' holding in the blocks will come down to 60-70 per cent. Nineteen out of 23 blocks lie off the East Coast, while two blocks are onshore, in Assam and Gujarat.
The deal, which also includes Reliance and BP setting up an equal joint venture for sourcing and marketing of gas, would give BP a definitive footprint in one of the fastest growing gas markets in the world.
Reliance will get an upfront payment of $7 billion while another $1.8 billion is linked to exploration success. The extra cash would help Reliance become a debt free company as announced by Chairman Dhirubhai Ambani during the annual results. However, that is unlikely to give any momentum to the stock, which is trading at two -year lows.
Jagannathan Thunuguntla of SMC Global said, "I don't think there will be any impact on the stock. If RIL becomes debt free, that will reduce the return on equity... Extra cash has been a drag on the stock... It suggests that company is running out of ideas where to invest money."
Earlier, the deal got delayed because the Directorate General of Hydrocarbons (DGH) had been studying all the PSC involving 23 oil and gas blocks that need to be modified to include RIL’s new partner BP. The DGH is the technical arm of the Petroleum Ministry.
Reliance is the operator in all the 23 blocks, while Canadian Niko Resources and UK's Hardy Oil have minority 10 per cent interest in a few. After the deal, Reliance' holding in the blocks will come down to 60-70 per cent. Nineteen out of 23 blocks lie off the East Coast, while two blocks are onshore, in Assam and Gujarat.
The deal, which also includes Reliance and BP setting up an equal joint venture for sourcing and marketing of gas, would give BP a definitive footprint in one of the fastest growing gas markets in the world.
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