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.
But
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.
We
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.”
There
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.
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