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British oil giant BP Plc ( BP - Analyst Report ) has received a permit from the Indian government for a $7.2 billion (5.3 billion euros) pact with Reliance Industries Ltd. (“RIL”). The deal was struck in February this year.
Per the agreement, BP plans to buy a 30% stake in 23 of RIL’s oil and gas production sharing contracts for a consideration of $7.2 billion. The contracts include India’s largest gas field KG-D6.
Also included in the deal is an extra payment of $1.8 billion related to exploration success, which would in turn result in further commercial discoveries. Together, the stake would cost BP up to $20 billion.
BP’s expertise will provide RIL the much needed help in finding more oil and gas and enhancing output at KG-D6. Reliance will be able to access BP’s deepwater-drilling skills to improve gas production at its field.
The oil and natural gas assets, mostly off India's East Coast, cover around 270,000 square kilometers. Under the production sharing contracts between the two companies, Reliance will hold its operatorship of the blocks, which have a production capacity of about 1.8 billion cubic feet of gas per day, equivalent to over 30% of India’s total consumption.
This deal holds immense importance for BP, which has been facing a lot of trouble since the U.S. government imposed restriction on drilling in the Gulf of Mexico. The deal has opened new avenues outside the U.S.and would give BP entry into new markets having access to hydrocarbon resources.
BP has a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. For the longer term, we are Neutral on the stock. BP faces tough competition from ExxonMobil Corporation ( XOM - Analyst Report ) and Total S.A. ( TOT - Analyst Report ) .
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