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India gushing

The Reliance-BP deal marks a turning point in India’s hunt for energy at home.

india Updated: Feb 22, 2011 21:24 IST

Reliance Industries has managed to get Big Oil back into India. BP’s purchase of a 30% stake in 23 of Reliance’s oil and gas fields for $7.2 billion (around R32,400 crore) makes it a big deal for corporate India. Throw in a venture for sourcing and marketing natural gas in India and the $20-odd billion (around R90,400 crore) foreign investment is nearly twice as large as the next biggest deal: the $11.08 billion (around R49,970 crore) purchase of Hutchison’s stake in India’s third largest telecom service provider in 2007.

BP has timed its entry after India sorted out issues over who owns the gas found after exploration, whom it can be sold to and at what price. For Reliance Industries boss Mukesh Ambani, the struggle to pump more gas out of the ground should ease off with BP’s deep-water prospecting technology. In any case, the deal provides a more realistic assessment of the value of Ambani’s concessions, which turns out to be less than what the stock market had priced in. There is another, broader, story beyond the corporate merger. Big Oil has resolutely stayed out of India since Esso, Burmah-Shell and Caltex, were nationalised after the 1973 oil shock. The pressing need then (apart from controlling fuel prices) was to build India’s refining capacity. Both were achieved: India is among the world’s largest refiners of oil, and fuel prices are still subsidised by the government.

The enormous refining capacity cloaks our measly crude output. Efforts to get international oil majors to prospect in India have till now been stonewalled. The only major player is the mid-sized British company, Cairn Energy, which, incidentally, is selling its Indian assets. BP’s entry changes all that. For one, it signals old memories may have faded. Two, the string of finds in the Bay of Bengal and off the Gujarat coast may now be significant enough to bestir the Exxons, Shells and Chevrons. By BP’s estimates, India’s energy consumption has tripled in the last 20 years and is set to double in another 20. This isn’t a market Big Oil can afford to ignore.