BP Plc (BP) and Reliance Industries Ltd. are seeking the Indian government’s approval to develop satellite fields near the Krishna-Godavari (KG) basin discovery. This move is reflective of the joint venture’s attempt to boost gas production, which has lagged their expectation till now.
In August, two energy giants closed their $7.2 billion agreement for a deepwater oil and gas exploration program in India. Per the deal, the British oil giant acquired a 30% stake in 23 oil and gas blocks operated by Reliance. BP will shell out another $1.8 billion if the companies discover more hydrocarbon than they expect.
Now, Reliance is constantly trying to enhance gas production at the D6 block in the KG basin, off India's east coast, particularly after encountering the pressures of slow output for months. Presently, the block produces 44 million standard cubic meters a day (mscmd) of gas versus its year-earlier level of 60 mscmd. Reliance has a production goal of 80 mscmd gas by April 2012.
With expectations of a timely approval, BP remains hopeful of increasing gas production by 2014 given its deepwater expertise. The group also plans to arrange for a gas marketing joint venture in the next couple of months and evaluating potentials to add output from other regional blocks such as NEC 25, located in the Mahanadi basin.
The BP-Reliance tie-up is expected to prove positive for BP, which is strengthening its foothold in growing energy markets, like India. The British oil giant remains focused on a string of upstream activities while disposing of much of its lowest return refining business in the U.S. We believe BP's new strategy of active portfolio management, higher exploration activity and refining and marketing repositioning will create value for shareholders.
However, given its tempered third quarter production outlook for operational disruption in the Gulf of Mexico, acquisitions and divestments, we see the stock performing in line with the broader market and maintain our Neutral recommendation. The company competes with Royal Dutch Shell Plc (RDS.A) and Total SA (TOT).
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