BP Says India Must End Gas-Price Controls to Attract Investment

India needs to move toward ending controls on natural gas prices to encourage investments in offshore energy exploration, BP Plc (BP/) Chief Executive Officer Robert Dudley said.

“In general, deepwater requires a lot of capital, it’s a lot of risk,” Dudley told reporters in New Delhi today. “You obviously need to develop mechanisms that’ll create the rewards for all that risk. Over time, free-market systems are what any economy needs to be able to ensure efficient development.”

BP completed a $7.2 billion acquisition of a 30 percent stake in 21 fields operated by Reliance Industries Ltd. (RIL), including KG-D6, the country’s largest gas deposit. The companies have applied to the government to develop new areas in the block to reverse a slump in gas production from the main reservoir, Dudley said.

Dudley and Reliance’s billionaire Chairman Mukesh Ambani met Oil Minister S. Jaipal Reddy and Commerce Minister Anand Sharma in New Delhi today. They may meet Finance Minister Pranab Mukherjee and Dudley will likely call on Prime Minister Manmohan Singh, the Economic Times reported.

Production plans in the new areas haven’t been approved by Indian regulators, a person with direct knowledge of the matter said last week. Tests show that increasing output from existing fields may be unviable at current prices, the person said.

“D6 is a golden block, it’s a great resource in India,” Dudley said. “We’re working with the government now for additional approvals. We’re hoping by 2014 the gas production will go back up again.”

U.K. Gas Price

Reliance sells gas from the block off India’s east coast at less than half the price in the U.K. The government set the price of the fuel from the KG-D6 area at $4.2 per million British thermal units in 2007 and is scheduled to revise it in April 2014. The Mumbai-based company sought a rate of $4.5 per million Btu at the time.

U.K. gas prices for October fell 0.3 percent at 58 pence a therm as of 10 a.m. in London. That’s equal to $9.07 a million British thermal units.

Profit at Reliance has missed analysts’ forecasts for six of the last seven quarters and its shares have slumped 25 percent this year as gas production fell. Decisions by India’s cabinet have slowed after a minister, bureaucrats and company officials were jailed over corruption charges related to cellular phone licenses.

Prices need to be increased to cover deepwater drilling and pipeline costs, said Chokkalingam G., chief investment officer at Mumbai-based Centrum Wealth Management Ltd., which owns Reliance shares.

Free Pricing

“Free pricing of commodities, including gas, is essential and the government needs to slowly move toward that process,” Chokkalingam said by telephone. “That will attract more global companies to invest in India, increase production and achieve demand to meet the economic growth targets.”

Tests by Reliance have shown that gas-bearing layers of sand in the two main producing areas of the block are thinner than initially estimated and extraction may require costlier drilling techniques, the person familiar with the company’s plans said last week.

Satellite fields in the KG-D6 block and discoveries known as the R-Series together have the potential to produce as much as 35 million cubic meters a day of gas, the person said. The block produced 60 million cubic meters in June 2010.

The decline in gas production, which is currently less than 45 million cubic meters a day, is likely to have a modest impact on the company’s financial health, Moody’s Investors Service said today.

BP’s Role

Having BP as its partner will provide Reliance with the technical expertise it may need to overcome operational challenges, Vikas Halan, a vice president at Moody’s in Hong Kong, said in a note.

BP is seeking to get access to the “fast-growing Indian gas markets,” Dudley said Feb. 21, when the deal with Reliance was announced. The investment by BP will accelerate development and production from Reliance’s fields, Ambani said the same day.

“BP is working in India now for things that will be developed in 20 years,” said Christine Tiscareno, an equity analyst at Standard & Poor’s in London. “India is important for BP. Gas consumption is growing very fast, maybe faster than China’s.”

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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Photographer: Graham Crouch/Bloomberg

Anand Sharma, India's minister of Commerce and Industry, left, shakes hands with Robert Dudley, chief executive officer of BP Plc, center, and Mukesh Ambani, chairman of Reliance Industries Ltd., during a meeting in New Delhi.

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Photographer: Graham Crouch/Bloomberg

Anand Sharma, India's minister of Commerce and Industry, left, shakes hands with Robert Dudley, chief executive officer of BP Plc, center, and Mukesh Ambani, chairman of Reliance Industries Ltd., during a meeting in New Delhi. Close

Anand Sharma, India's minister of Commerce and Industry, left, shakes hands with Robert Dudley, chief executive... Read More

Photographer: Chris Ratcliffe/Bloomberg

Robert Dudley, chief executive officer of BP Plc. Close

Robert Dudley, chief executive officer of BP Plc.

Photographer: Pankaj Nangia/Bloomberg

Mukesh D. Ambani, chairman of Reliance Industries Ltd. Close

Mukesh D. Ambani, chairman of Reliance Industries Ltd.

Photographer: Chris Ratcliffe/Bloomberg

Anand Sharma, India's minister of commerce and industry. Close

Anand Sharma, India's minister of commerce and industry.

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