BP’s venture in India is bumping against hard economic and political realities. But the group is probably right to take its chance
Not a lucky streak for BP. Last year its proposed alliance with Rosneft, aiming at boosting exploration in the Russian Arctic, foundered. A bit earlier this month the British major hinted it might lose a major stake in a huge Abu Dhabi oil offshore concession. And now the company is being questioned on the slow progress of its first-ever investment in India – a $7.2bn venture that was trumpeted as a major landmark only but a few months ago.
The landmark deal, which sees BP partner with billionaire Mukesh Ambani’s $58bn Reliance conglomerate, makes sense for everyone. It placed the British group as the first oil major to step in one of the most energy-hungry emerging markets. It also allowed BP to team up with a perfect collaborator, whose reputation for getting things done and political connections are rare assets in India. There was great hope that, finally, BP would regain the credibility and profitability it had lost in the aftermath of the Deep Horizon oil spill.
But what was India’s largest-ever foreign direct investment is now fraught with difficulties. Production from the Krishna Godavari basin, known as KG-D6, continues to dwindle. The alliance also finds itself embroiled in endless bureaucratic travails, struggling to gain permissions for expenditures on the main field. And the price of gas makes many of the tie-up’s projects hardly profitable. All of which has pushed down the value of the field by two third, and BP’s 30 per cent stake is now worth little more than $2.4bn. The group is facing harsh criticisms that it just paid too much.
Is there a morale to the BP story? Well, it probably provides us with another example of BP’s questionable judgement. Rushing to restore reputation and revenue in after the Gulf of Mexico disaster, the group might have carried out only but a hasty due-diligence, overlooked difficulties and overrated KG-D6 available reserves.
But BP’s woes shed just as much light on India’s deeper structural flaws. Years of public and private underinvestment help explain why oil production has been declining for a good part of the past decade. Public funds have more often been spent on social programs and subsidies instead – generally in a bid to support electoral favours – and the opaque system that awards licences to mining and energy groups have sheltered many from competition, providing little incentive to invest.
The alliance’s bureaucratic nightmare also illustrates the emerging market’s paradoxical stance towards big business and foreign investment. Whilst it recognises domestic and industry champions as the indispensable engines of India’s economic modernisation, its leading politicians are often tempted to bash them to prop up popularity and court votes. Hence a number of policy reversals on major liberalising initiatives (retail, telecom). They also want to be seen as tough against corruption – an endemic problem on the sub-continent – which often implies severing former cosy relationships with India’s big business. Mr Ambani may be one of the first casualties of this harsher stance.
The low price of gas, finally, is also partly linked to governmental policies. In order to limit its whopping budget deficit and keep inflation under control, Mr Singh’s government forces energy companies to sell gas at a third of the Asian market rate. And its failure at removing oil and gas subsidies – which cost billions to the government every year – mean that a higher selling price is not in the cards. The BP-reliance venture can’t hope for major pricing breakthrough anytime soon.
Still. Despite these hurdles, the deal may well be worthwhile. BP remains the only major player in India, and will be the one to reap major benefits if findings materialise. Even if critics say the main field’s potential reserves are probably lower than expected, the package BP purchased also included stakes in another 22 oil and gas blocks, which may well hide a few gems. It also came with a gas-marketing joint venture to import LNG in India’s fuel hungry domestic market.
And summer has brought some good news to India, too. Data released last month showed a narrowing trade deficit, healthier manufacturing, slowing inflation, and rising equities. The departure of Pranab Mukherjee from the Finance ministry, replaced by his prime minister after a first 2012 semester scarred with gaffes, policy reversals and economic nonsense, provided hope to those who believe India can still be ushered towards structural reforms. Manmohan Singh is known for unleashing a wave of groundbreaking reforms back in the 1990s.
Then again, the prime minister’s track record is not all bright. Over the past few years he has presided over an alliance that has repeatedly failed to deliver on its promises, and who has been ensnared in numerous corruption scandals. It might well take years for BP to complete its Gulf of Mexico clean-up. Let’s hope Mr Singh will need less time to silence those who believe India’s economy is going adrift.