|Oil’s well finally?|
|Tuesday, 22 February 2011 00:00|
The $7.2-bn deal BP has just signed with Reliance Industries for a 30% stake in 23 oil and gas fields controlled by the latter is clearly good news for RIL shareholders, and will help find the company’s huge capex needs in the oil sector, but it’s even better news for the country. As far as size goes, it is much smaller than the $11.2 billion Vodafone paid for Hutch’s stake in February 2007, though the company press statement says the ultimate investment could be upwards of $20 bn. Given the problems RIL is reportedly facing in the KG-D6 fields, BP’s experience will come in handy; the joint venture will also work on importing, transporting and marketing natural gas in India, given how this will be the fastest growing fossil fuel in the country in the near future. The move is also significant, given RIL’s legendary reluctance to offer equity partnerships to outsiders in the past, especially in existing ventures (BP owns a 50% stake in one of RIL’s blocks, as do companies like Niko, but all of these are greenfield ventures)—given the size and the complementary strengths required for big projects, RIL has taken the right step.
The fall in foreign direct investment (FDI) into the country has been the subject of concern over the past few months—as compared to $34.8 bn in 2007-09, $37.8 bn each in 2008-09 and 2009-10, FDI in April-November 2010-11 was a mere $19 bn. The RIL-BP deal won’t ensure FDI in 2010-11 overtakes that in the previous years, but it does reduce the difference considerably. More important is what it says about India as an FDI destination in the petroleum sector. At the height of the Mukesh-Anil Ambani fight, the government took the view, endorsed by the Supreme Court finally, that the oil and gas belonged to the government, that companies like RIL were just contractors, and that the price of gas and who it should be sold to would be decided by the government. If this wasn’t bad enough, the petroleum ministry followed this up with blocking the Cairn-Vedanta deal on the grounds that this would hit ONGC’s interests even though there was no change in the ownership of the operating company—also, since ONGC’s contract said it would pay the royalty, the government stance put off investors. If despite this, BP is still prepared to invest in India, it suggests India’s potential makes the risk worth taking. It also signals BP believes the government is likely to be less intransigent in the future. Investors getting more positive about government policy can only be a good thing.