BP, Reliance Industries lock themselves in a 10-year marriage

BP Plc and Reliance Industries (RIL) seem to have willingly tied themselves into a decade-long marriage.

Both will not partner any other company in the exploration business in the next five years and in marketing and trading gas until 2021.

“The partnership includes a 5-year exclusive area of mutual interest (AMI) upstream agreement and a 10-year exclusive AMI for the gas marketing business,” a spokesperson for BP told DNA Money.

Based on the prices paid by BP, the deal values RIL’s new E&P or exploration and production business at close to $25 billion.

Further, BP rules out the possibility of RIL partnering it in any of the overseas projects it is currently engaged in.

This could be a big setback to RIL’s ambitions of competing against the global oil majors, including Chevron Corp.

Although BP’s entry in India significantly helps derisk the oil major’s exposure, RIl would have liked to partner BP in exploration in key oil and gas basins, including the Russian Arctic exploration venture, which BP is doing with a partnership with state-oil major Rosneft, announced last month.

Experts, however, differ whether RIl not able to work with BP on overseas projects is a setback to the Indian conglomerate.

“It is BP that is interested in buying RIL’s assets because their assets might have  attracted them. Reliance might have deliberated over BP’s assets and might not have found them worthy to invest into,” said S P Tuslian, an independent sotck analyst.

BP will use its internal accruals to pay $7.2 billion due to paid in three tranches to Reliance Industries in the next fiscal year.

“BP will not be seeking to raise money from outside. The remaining funds [$11billion for the joint venture] are the combined investment over the next decade,” the BP spokesperson said.

Analysts are also questioning the logic on BP paying such a high price.
“For a decade results in the basin have been mixed and the hype surrounding the KGD6 discovery in 2002 quickly disappeared. We acknowledge that BP has better technology than most other players operating in the area and this could make a difference in maturing new prospects. That said, we see this too big a commitment for accessing this LT opportunity,” analysts with Bank of America Merrill Lynch wrote in a note on Tuesday.

Finally, RIL’s tax obligations on the money received are still not clear, thereby making many a bit uneasy.

DNA Money also learns that Mukesh Ambani, the chairman and managing director of RIL, had in the last four years approached a couple of oil majors before choosing the world’s second largest publicly traded oil firm.

But talks did not make much headway. At the start of 2009, both companies renewed discussions before finally announcing the deal.

Morgan Stanley was the advisor to BP while the RIL did not have any seek any outside help, other than Goldman Sachs being the financial advisor.

The RIL scrip was up 2.98% to close the day at `985.05 on Bombay Stock Exchange even as the BSE-30 Index, or Sensex, declined 142.15, or 0.8% percent, to end at 18,296.16.