BP’s $7 Billion Reliance Deal in India Pushes BRIC Strategy

Robert Dudley’s second $7 billion deal this year signals a shift for BP Plc toward the world’s fastest-growing economies as exploration drilling remains closed in the U.S. after the Macondo oil spill.

Dudley, the first American chief executive officer of the London-based company, agreed yesterday to pay Reliance Industries Ltd. $7.2 billion to help explore deepwater fields in India. That follows an $8 billion share swap with OAO Rosneft to expand into Russia’s Arctic Sea in January. Last year, BP signed a deal to explore off Brazil and sealed a partnership with Cnooc Ltd. for offshore licenses in the South China Sea.

The deals are putting BP’s exploration unit closer to regions that the company predicts will generate the majority of energy demand growth for the next 20 years. Dudley is also reducing BP’s dependence on the Gulf of Mexico, where it has yet to resume drilling following the worst U.S. spill.

“The Reliance deal represents another step in reshaping BP’s portfolio,” said Theepan Jothilingam, an analyst at Morgan Stanley in London. “The strategy earmarked post-Macondo is clear -- a genuine focus on exploration and a shift toward resource and consumer markets.”

BP rose 0.2 percent to 492.75 pence as of the 4:30 p.m. London close. Reliance gained 3 percent, the most since Dec. 10, to 984.85 rupees in Mumbai. Reliance may use the money from BP to expand overseas, said Taina Erajuuri, who helps manage the equivalent of $1.2 billion at Helsinki-based FIM Asset Management Ltd.

$20 Billion

In India, BP will acquire a 30 percent interest in 23 blocks as well as form a venture with Reliance to market gas, the London-based company said yesterday. Future performance payments and investment could increase the size of the deal to $20 billion.

Dudley said the investment in India doesn’t mean the company will turn its back on the U.S., where the company is obliged to pay into a $20 billion fund for spill victims for the next three years.

“We’re fully committed to the U.S.,” Dudley said in a press conference yesterday. “This is part of the shift in energy demand across the globe.”

BP predicts that global energy use will rise by almost 40 percent by 2030, led by demand from emerging economies, according to the Energy Outlook 2030 report published Jan. 19. BRICs is a term used to group the four major emerging economies, Brazil, Russia, India and China.

‘Moving On’

“The game-changing moves announced with Rosneft and Reliance this year, in addition to other positive exploration access exposure, give us confidence that BP is moving on from Macondo,” said Jason Kenney, head of oil and gas research at ING Wholesale Banking in Edinburgh.

President Barack Obama halted oil and natural-gas drilling in waters deeper than 500 feet (152 meters) after BP’s well off the Louisiana coast blew out April 20, killing 11 workers and spewing crude for 87 days. While the ban was lifted Oct. 12, the U.S. has yet to issue a permit for the type of exploration stopped in the moratorium.

Reliance Chairman Mukesh Ambani said yesterday he chose BP because it is “one of the finest deepwater exploration companies in the world.” BP’s purchase, to be completed over the course of this year, is the largest foreign direct investment in India.

‘Strong Credentials’

“It’s a bold move not long after Macondo,” said Ivor Pether, who oversees $12 billion of U.K. securities at Royal London Asset Management and added to his BP holdings last year. “It’s evidence that BP still has strong credentials in deepwater.”

Like the equity swap in Russia, BP’s Reliance deal may carry some political risk, said Colin McLean, chief executive officer of SVM Asset Management Ltd. in Edinburgh, who oversees about $900 million of securities including BP shares.

Cairn Energy Plc’s agreement to sell 90 percent of its Indian production to Vedanta Resources Plc is being held up by a dispute over royalty payments to the state-owned Oil & Natural Gas Corp. The Indian government has yet to approve the purchase.

“Governments have been fearful of the majors and that’s why so many juniors have entered developing economies,” said McLean. “It needs political will and good political relationships.”

BP will pay for the India deal in cash. Dudley said yesterday the company still has $8 billion of assets to sell after $22 billion of divestitures following the spill. The potential for uncovering more crude and gas in the blocks is the part of the deal he’s most excited about, he said.

“Dudley’s moving really quickly,” said Christine Tiscareno, an equity analyst at Standard & Poors in London. “For BP, there’s no alternative to deepwater exploration.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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BP Plc Chief Executive Officer Robert Dudley

Ben Stansall/AFP/Getty Images

BP Plc Chief Executive Officer Robert Dudley agreed yesterday to pay Reliance Industries Ltd. $7.2 billion to help explore deepwater fields in India.

BP Plc Chief Executive Officer Robert Dudley agreed yesterday to pay Reliance Industries Ltd. $7.2 billion to help explore deepwater fields in India. Photographer: Ben Stansall/AFP/Getty Images