New Delhi: BP's $7.2-billion deal to jump into India's oil and gas sector with Reliance Industries is the first sign of new investment that could attract more players, helping to boost output and meet surging demand.
The world's third-largest economy is expanding at more than 8 per cent a year. But it struggles to pump even a third of the oil it guzzles, while gas use - limited by poor infrastructure - is already 30 per cent more than production.
India has sought to attract the big international players since 1999 with its New Exploration Licensing Policy (NELP) but still only two foreign companies - BG and Cairn Energy - are producing any serious amounts in the country.
"This deal brings in one of the majors in a material way. Twenty-three blocks and an important gas play," said Richard Quin, lead analyst for Middle East, North Africa and India at energy research consultancy Wood Mackenzie. "I suspect the Indian government is very happy about it."
BP, which has only one block, picked up through Indian government auctions, is now paying privately-owned Reliance for a 30 per cent stake in 23 of its blocks, including the big gas producer D6 in the Krishna Godavari basin.
The blocks now produce about 1.8 billion cubic feet/day (bcf/d) - more than 40 per cent of India's total production and more than 30 per cent of total consumption.
The British-based company figures there are at least 15 trillion cubic feet (tcf) of gas resources in the blocks - enough to meet India's current rate of consumption for seven years.
It is BP's biggest investment in exploration and production in Asia, with a potential total of $20 billion linked to exploration successes.
"It would be wrong to downplay the prospectivity of the 23 blocks. There has to be a reason BP bought in. Fundamentally, BP is in the business of producing hydrocarbons," Quin said.
At the same time, BP could use its technical expertise to boost output at Reliance's D6 block.
It is India's biggest gas find but output has slipped because of technical problems to about 52 million cubic metres a day (mcm/d) from 60 mcm/d in October and short of a target 80 mcm/d.
Reliance Industries will benefit from the tie-up with BP by being able to take advantage of BP's technical capabilities, analysts said, in turn enhancing the valuation of India's biggest company's existing assets.
BP India head Sashi Mukundan would not be drawn on future output estimates.