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Press Release [FREE Access]
Petro Intelligence » KG-D6: BP’s Dummy Run

This must be the ultimate red herring.

When BP forked out $ 7 billion to pick up a 30 per cent participating interest in 21 oil and gas blocks that Reliance Industries operated in India, it was touted as a sign that the problems that had been encountered at the KG-D6 deepwater field was just a hiccup and help was on the way from a recognised expert in the business.

Carl-Henric SvanbergBut three years since that investment was made – and with no sign of a full-scale resumption of gas exploration in the field – there is a view that is now gaining ground that BP was never really serious about gas exploration in India.

And that’s where the red herring comes in. A red herring is a deliberate ruse employed to mask one’s real intentions and throw someone off the trail.

Our previous piece in this Column, Gas Price Hike: A Sisyphean Saga, generated a lot of discussion in the informed circles in the oil and gas sector. We had closely examined a view expressed by a Planning Commission official who questioned the real reason behind the rising clamour for the implementation of the contentious Rangarajan formula for gas pricing.

This official claimed that the gas pricing formula – which was thrown into a limbo since it was notified in January this year by the earlier UPA government – was actually designed to crank up domestic gas prices in order to make India an attractive destination for LNG supplies that a 50:50 joint venture between RIL and BP intended to bring into the country.

Almost everyone who read the article agreed with that assessment. However, the mystery behind the investment of $ 7 billion in RIL’s 21-and-odd Production Sharing Contract (PSC) blocks remains unresolved.

Bob DudleyWe have been making enquiries both in India and the UK to determine why BP had decided to ally with RIL. Earlier, we had reported that more than a decade ago BP had tried to partner RIL in KG-D6. It had even started negotiations with Mukesh and Anil – the Ambani scions who hadn’t split the family business then – but the proposal was vetoed by patriarch Dhirubhai Ambani. BP also lost the race for RIL’s contract to manage the operations of its Jamnagar refineries which went to Shell.

BP finally made the investment in 2011. By that time, KG-D6 had started to founder with gas production from the field plummeting after touching a high of 60 MMSCMD. The targeted production had been higher at 80 MMSCMD. When BP sprang to RIL’s rescue, it discovered that KG D6 had only 3 TCF of reserves against RIL’s claim of 11 TCF and a DGH- endorsed 10 TCF.

It is highly unlikely that BP, which is considered more conservative than competitors Shell and Mobil, would have made the investment without assessing KG-D6 reserves. RIL’s detractors, including responsible officials of DGH, had alleged that RIL was hoarding gas. We have never subscribed to that theory. We believed that this was part of an elaborate subterfuge hatched by geologist P. Gopalakrishnan who, after having endorsed 10 TCF of reserves, could not recant his assessment. A company like BP cannot be a party to hoarding and that too in a country as large and politically sensitive as India.

That forced us to confront an uncomfortable truth: surely the paltry reserves left in KG-D6 could not have lured BP to invest as much as $7 billion in 21 blocks – all of dubious merit. Could it have been possible that the BP management tried to pull wool over the eyes of its board members while getting them to approve the investment in India? We posed this question to a UK-based Indian who is on the board of a big company there. “Impossible,” he replied.

 “It is hard to believe that the BP board would have agreed to such an investment with full knowledge of the declining reserves. It also appears impossible that a company like BP did not know about this when it decided to invest,” said another expert. The BP management would have come under fire from its shareholders who now know what the situation really is. We haven’t heard of any restiveness among BP shareholders on this count.

We dipped into BP’s annual reports. Here is an extract from BP’s annual report of 2011: “On 30 August 2011, BP and Reliance Industries Limited (RIL) announced the completion of BP’s acquisition of a 30% stake in 21 oil and gas PSCs that RIL operates in India, including the producing KG D6 block. BP paid RIL an aggregate consideration of $7.0 billion for the interests acquired in the 21 PSCs. Further performance payments of up to $1.8 billion could be paid in case of exploration success in certain blocks that result in the development of commercial discoveries. This step commenced the planned alliance which will operate across the gas value chain in India, from exploration and production to distribution and marketing.

On 17 November 2011, the two companies formed a 50:50 joint venture for the sourcing and marketing of gas in India.”

Mukesh AmbaniThere is one niggling question here: does the $ 7 billion investment cover the LNG JV as well? It is not very clear from BP’s Annual Report. If one goes by the Court Submissions of RIL, the investment is only in the 21 PSC blocks of RIL. We asked a few experts in the field who have a fair knowledge about the intricacies of such investments. “I cannot give you any reply to your question because no one knows the exact terms of BP’s investment. If everything is as reported, then BP cannot take away the money it has paid to buy a 30% interest in RIL’s concessions,” said one expert.

There is a consensus among experts that BP made the investment in KG-D6 with the full knowledge that its reserves were declining. Did it make sense to make that investment? Could it be considered a prudent investment? The answer to both questions is an emphatic No. So, it is pretty much obvious that the only reason to make the investment was the lure of the prospective business that would be afforded by the joint venture with RIL for the LNG business.

Both BP and RIL realised that that the investors who had made huge investments in the power and fertiliser sectors, based on the projected gas flows from KG-D6, suddenly found themselves caught in a bind. The LNG venture between RIL and BP had a captive market for their LNG venture. It is quite possible that BP might have been given rights to supply LNG for this venture.

The picture is not totally clear as yet about the investments made in the PSC blocks. We sought the views of Dr Surya P. Sethi, an acknowledged expert on the issue. “ The exact terms of BP’s investment are not known. The terms may have conditions that require RIL, at some level, to do certain things that ameliorate BP’s risk in making the investment,” Sethi said.

One thing is clear: RIL headed by Mukesh Ambani, son of Dhirubhai Ambani, cannot be out-smarted by BP. In fact, Indian businessmen are acknowledged to be shrewder than their counterparts elsewhere. Surely, BP is only too keenly aware of this fact. But BP cannot be fooled either. It had dealt with RIL earlier and has picked its way through dangerous minefields in different geographies. That still leaves us with a set of unanswered questions that shareholders in BP might like to raise with the management whenever the opportunity arises. We will continue to raise the questions; our quest for answers isn’t over.



To download the latest issue 'Volume 30 Issue 24 - March 25, 2024', click here
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