British Petroleum (BP) and Reliance Industries have announced a two-pronged partnership that will see BP take a 30% stake in select Reliance oil and gas fields in India, while the two companies will also create a jointly owned sourcing and marketing company. The total outlay for BP will be up to $20 billion.
BP will acquire 30% of 23 oil and gas production sharing contracts, covering approximately 270,000 square kilometres, that India’s largest private-sector company operates in its home country. The two companies will also form a 50:50 joint venture for the sourcing and marketing of gas in India. The JV will work towards creating the infrastructure for receiving, transporting and marketing of natural gas in India.
The partnership will combine BP’s world-class deepwater exploration and development capabilities with Reliance’s project management and operations expertise, BP said in a written statement announcing the deal. The release described Reliance as “a natural partner [for BP] in India, given [Reliance’s] strong position in the Indian market”.
Reliance will continue to be the operator under the production-sharing contracts. The production at the 23 blocks currently account for more than 30% of India’s total oil and gas consumption and more than 40% of India’s total production. BP will pay Reliance $7.2 billion, and completion adjustments, for the 30% stake in the 23 production sharing contracts. It will also make future payments if the exploration leads to the development of commercial discoveries. In total BP has agreed to shell out up to $20 billion.
The deal is subject to regulatory approvals in India. And with Vedanta’s $10 billion bid to take over Cairn India’s interest in 11 oil blocks in India and Sri Lanka currently mired in controversy, some specialists suggest these cannot be assumed to be forthcoming. However, sources close to the deal highlight the fact that BP’s investment is a minority stake and not, like the Vedanta takeover, a control transaction. Further, India has a lot at stake as the deal is one of the largest foreign direct investments (FDI) into India and will be closely watched by international players as an indication of how open the economy really is.
For a deal of this magnitude and importance it is also reasonable to assume that a pre-sounding of the authorities would have been done at the appropriate levels. Reliance, controlled by billionaire Mukesh Ambani, has extensive experience on such issues, which will no doubt play to BP’s advantage in securing approvals.
BP and Reliance are well known to each other as oil majors operating in the same industry. The two companies have been working together since December 2008 on a specific deepwater project in the Krishna Godavari (KG) basin on the east coast of India. BP has a 50% interest and operates the block, while Reliance owns the remaining 50%. Thus, no formal introduction was made by any third party.
Goldman Sachs has been working with Reliance since late 2007 to induct a strategic investor in some of Reliance's development projects. BP was in the fray, along with other parties, and the British firm devoted considerable time and energy to the opportunity, given Reliance's strategic fit with BP’s long-term goals, said a source. The process has been derailed a number of times by various macroeconomic issues and by the family feud between Mukesh Ambani and his younger brother Anil. Talks started again in earnest at the end of last year and the deal announced late on Monday was negotiated very quickly, in just a few weeks, added the source.
Morgan Stanley advised BP, which means the US investment bank can reasonably be assumed to be on the side of the table that is going to earn a fuller M&A fee. Indian companies are loathe to pay large advisory fees, although they have become somewhat more forthcoming with fees on deals that involve financing commitments.
However, this is a franchise deal for both investment banks. BP and Reliance will be high on the targeted client list at both Goldman Sachs and Morgan Stanley and whether they are on the buy- or sell-side, a deal of this size will go a long way in cementing relationships with the parties involved.
Still, perhaps more credit ought to go to Goldman Sachs for winning a mandate from an Indian client that is aggressively banked by a host of players, including well-entrenched local firms, and a regular user of investment banking services. Indeed, Reliance won FinanceAsia’s Borrower of the Year award last year in acknowledgement of the debt it raised during 2010. And, while the joint venture with BP may not be a blockbuster fee earner, it will certainly position Goldman Sachs well for further business from Mukesh Ambani.
For both investment banks, which have started standalone operations in India in the past five years, the deal is testament to how quickly they have built up their Indian franchises and credibility. Goldman Sachs sold its stake in its joint venture with Uday Kotak in 2006. Morgan Stanley decided to go it alone in India even more recently, in 2007.
The deal is also going to catapult the two US investment banks to the top of the league tables for India. It continues a trend, which has been gaining momentum in the past couple of years, of multi-billion-dollar deals between natural resources players in Asia-Pacific and the West. Yesterday, BHP Billiton announced it will acquire all of Chesapeake Energy's Fayetteville shale gas assets in the US for $4.75 billion. Barclays Capital is advising BHP, while Jefferies, which is building an enviable track record of oil and gas deals, is on the side of Chesapeake.
