Now, BP-RIL deal under security

Government clearance for BP’s $9-billion purchase of 30% stake in Reliance Industries’ oil and gas blocks could take longer than expected as the petroleum ministry has decided to seek security clearance from the home ministry.
The oil ministry has written to the home ministry seeking its views on the antecedents of the 13 directors on the London-based company’s board, out of which four have executive role, including chairman Carl Henric Svanberg. It has also sought the home ministry’s assessment of BP’s track record and ability to handle environmental risks, particularly in offshore exploration.

The ministry’s concern is in view of the fact that many of the Reliance-operated fields are in the Krishna Godavari, Cauveri, Mahanadi and Kerala-Konkan-Lakshadweep basins in the Indian peninsula. RIL’s offshore blocks are at a maximum depth of 3,000 metres, although they are not as deep as the ultra-deepwater blocks around the world that are more than three times deeper.
The fresh security concerns about BP’s proposed acquisition of stake in RIL’s 23 oil and gas blocks has arisen in the wake of high stakes involved in the deal. Petroleum ministry, which hailed the deal as soon as it was announced in February, now does not want to leave any room for criticism that it cleared the transaction in haste.

Moreover, with environment issues taking the centrestage, policy makers have become extra cautious on approving projects in sectors such as mining and oil and gas exploration that are considered ecologically sensitive.

Confirming the security issue raised by the oil and gas ministry, a senior government official said that the home ministry will conduct further due diligence of the deal in the light of new partner being brought by Reliance Industries before giving its nod. “This could take few weeks to months depending on the cooperation the ministry gets from companies,” said the official who asked not to be named concerning the sensitive nature of the issue.

“BP has submitted relevant documents to the government of India as part of the application process for assignment transfer as non-operator. With regard to timing of the approval, we would not like to make any comments on procedural matters of the government. We will await their clearance for the farm-in in due course,” a BP spokesperson said.

When asked for comments on the petroleum ministry's decision to get home ministry's opinion on the security aspects of the deal, an RIL spokesperson said the company has no comments to offer on the matter.

The delay in clearing the deal, however, could pinch RIL as it is keen to conclude the transaction in the 2011-12 financial year itself before the new direct tax code (DTC) comes into force next year.
Cross Check

As per the existing Income Tax Act, if the exploration cost is more than the revenue generated from oil or gas, then the cost-not-recovered from the sale of hydrocarbons, can be recovered from the proceeds of transferring participating interest in that field, treating it as business income. In the proposed DTC, oil exploration is treated as a specified business and the set off of losses from this business against other business income would be restricted.

The security issue in merger and acquisition deal is a new development as all previous such deals were taken for such clearance only in sensitive sectors such as telecom etc. The government has in fact, launched the New Exploration and Licencing Policy (NELP), under which foreign investment is welcomed in onshore and offshore oil and gas exploration activities.

“The suo moto government move on getting security clearance is direct result of recent scams rocking the country which has made government cautious of every move it takes,” said an industry expert requesting anonymity.
For the government though, there are other instances of its sitting on M&A deals. London-listed Vendanta Resources’ bid to acquire Cairn India is currently being examined by a Group of Ministers, causing delays in the completion of the transaction. The petroleum ministry is also going slow on its shale gas exploration plan considering its environmental impact such as contamination of groundwater.
In the case of RIL-BP deal, the government’s concerns also stem from BP’s Gulf of Mexico tragedy last April--the largest marine oil spill in history--that led to the death of 11 people and serious damage to marine and wildlife in the region. It cost the company $17.7 billion till last December in its response measures and will cost more in restoring the environment and the affected economy.
For BP, however, India is not a new market. The BP spokesperson said that the company already has a business presence in India, employing about 8,000 people directly and indirectly.

The company has been a partner of RIL since 2008 and is operating the D-17 deep water block in the Krishna Godavari basin with a 50% interest. This block was given to the consortium in the seventh round of auction of blocks under the new exploration licensing policy (Nelp) approved by the union cabinet. Besides, even after BP taking 30% interest in RIL’s assets, the Indian company would continue to be the operator of these blocks.

The BP spokesperson said that Tata BP Solar, a joint venture between BP Solar and the Tata Group, has been operating in India since 1989. Castrol India Limited, a part of the BP group is a market leader in India’s retail automotive lubricant business and operates in industrial and marine lubricants sectors as well. The suggestion is that it would be wrong to treat BP as a new entrant into India.

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