Mukesh Ambani

Mukesh Ambani gets BP to pay $9 bn which he had spent

Reliance Industries (RIL) discovered the Krishna-Godavari basin gas trove in 2002. Four years later, it got approval to convert the block for development.

Last year, gas started flowing from the massive gusher. In all, RIL has invested about $9 billion in the 29 exploration blocks, according to the company’s submission to the Comptroller and Auditor General of India last year.

RIL sources said this includes $5.5 billion in the prolific D6. That’s almost exactly what BP will pay RIL “” $7.2 billion for a 30% stake in 23 blocks, plus $1.8 billion for future exploration success.

That leaves RIL with a 60% stake in blocks where its partner Niko Resources of Canada has 10% holding, and 70% in the rest of a geography that so far has found 15 trillion cubic feet of gas reserves.

India’s largest private company has thus practically got paid for all its exploration expenditure so far. Not to forget, RIL has already earned over $2 billion by selling the D6 gas in the last three quarters.

Swell deal?

You bet, said analysts.

“It puts RIL in a position to be debt-free,” Mukesh Ambani, chairman and managing director, said.

Primary discussions on a potential deal started in late 2007, Ambani said.

“And due-diligence was conducted for two years,” said Robert Dudley, CEO of BP Plc.

Deal making intensified over the last 3-4 months as tech teams from both companies tied up things, Ambani said. RIL will get the money in three tranches “” $2 billion upfront, a further $2.3 billion on completion of the deal, and a final payment of $3 billion in October 2011.

In all, the deal could involve investments of up to $20 billion from BP, said RIL “” a chunk of which would land up in a private company “” Reliance Gas Transportation Infrastructure Ltd.

“He got what he wanted,” said an observer who has been tracking both the company and its chairman Mukesh Ambani very closely over more than a decade. He did not wish to be named. Reliance’s current output of 1.8 billion cubic feet of gas a day, which is equal to 125,000 barrels of oil production per day, is nearly 40% of India’s total gas production.

All of this currently comes from D6.

While RIL boasts of a balance sheet that generates close to $6 billion or 27,000 crore of cash annually, analysts said what the deal brings to the table is a quick turnaround for the company’s various oil and gas exploration projects and faster commercialization of assets.

When the spat between the Mukesh and younger brother Anil was at its fiercest, the latter had accused RIL of “goldplating’, or showing more than what they were, investments made in D6 “” something the company vehemently denied.

Mukesh has also said that RIL needs a “cushion of $18 billion” by fiscal 2013 for developing D6.

BP is reputed to own the world’s best deep-sea oil and gas exploration technology. Acquiring that would have cost a fortune and even if it was willing to spend, it was difficult to get an oil company to part with the technology, said another analyst.

“This business requires deep pockets and although RIL has made early inroads, a partnership with BP will only help them realize the full potential of the business,” said Monish Chatrath, executive director at Mazars India, a consultant for the oil & gas sector.

“BP, on the other hand, gets a good footprint in India and it also diversifies the risk for RIL,” he said.

Europe’s No.2 energy giant also has a significant presence in the lubricants business in India through Castrol.

It’s not that RIL will just enjoy the cash flows, either.

“For every dollar BP invests, RIL will also invest a dollar. In some cases, we will invest even 2 dollars,” Ambani said.

“Personally I am a big believer in the potential of the east coast of India,” Ambani said.

Theepam Jothilingam, James R Hubbard, Mathew P Lofting and Albina Sadykova, analysts with Morgan Stanley, wrote in a note to investors after the deal that, “alongside the Rosneft transaction, the Reliance deal suggests BP under Bob Dudley has lost none of its appetite to execute industry leading moves”.

Within the exploration circles, RIL is known as a “wildcatter” that uses the “hit and run’ tactics to explore across the 270,000 square kilometers it owns.

For D6, RIL has hired two Houston, Texas-based energy specialists “” Halliburton and Schlumberger “” and hires deep-sea drilling vessels from Transocean.

“This is good news for the country’s energy security market,” said S P Tulsian, an independent stock analyst.

He expects BP to help Reliance ramp up the gas output from the Krishna Godavari basin to increase from the 56-58 million cubic meters a day currently to 80 million cubic meters a day in the coming six months and also lead to “very speedy production” from the 20 fields being explored by RIL.

“For Reliance it is a very good valuation though I think BP paid a bit on the higher side, thinking they are entering a country where there is high demand,” he said.

Niko should be also happy because this would lead to more gas production and therefore higher profit share, Tulsian said.

BP is trying to increase its investment in exploration in key oil and gas basins, including the Russian Arctic region where it announced an exploration venture with state-owned oil major Rosneft.