BP Rejects Nine Exploration Blocks in Bay of Bengal

on Oct 18, 2012
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British oil and gas company BP (LON:BP) has announced that after a detailed appraisal by its geologists and engineers, the company had rejected nine of its twenty-one licence areas in India’s Bay of Bengal, The Times reported on 16 October 2012. Earmarked for possible development, the exploration blocks were part of a multibillion project, but did not contain enough oil and gas reserves to justify the expense.

**Does BP’s Move Cast Doubt on the Size of Bay of Bengal Oil Resources?**
BP has surrendered control of nearly half of the oil and gas exploration blocks it was developing through a joint venture with India’s energy giant Reliance Industries (BOM:500325). The nine oilfields, each covering a section of the 50,000 sq km Krishna Godavari Basin off India’s east coast, were examined in detail by the company’s geologists and engineers who concluded that the areas did not contain enough resources to justify the expense of developing them. The exploration blocks will be returned to the Indian Government, which may try to resell them on.

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!m[Development Areas, Part of £4.4b Project, Relinquished Due to Insufficient Oil Reserves](/uploads/story/595/thumbs/pic1_inline.png)A BP representative played down the decision to reject nearly half of the licence areas, emphasising that the British company had bought a long-term stake in the entire Reliance Industries portfolio. According to the spokesman, the partners were simply weeding out fields that appeared less promising in order to prioritise investment. He said: “In choosing which blocks to pursue, clearly you also automatically also choose which of them not to pursue.”

**Focus on Boosting Output from Remaining Fields**
Speaking at an oil industry conference in Delhi earlier this week, BP’s regional president, Sashi Mukundan, said that the two companies were focused on boosting flagging production from KG-D6, one of the remaining twelve deepwater fields in the Bay of Bengal.
KG-D6, previously considered to be the most promising area in the basin, has shown flagging output results in the last two years. Reliance Industries holds geological uncertainties as well as high water and sand ingress in wells for the fall in production. These conditions have forced the company to shut down seven of the field’s wells. Since then total gas output has slumped to about 22 million cubic meters per day, about half the amount achieved shortly after production started in 2009. Estimates of the total reserves in the block have also been downgraded to 1.4 trillion cubic feet, which is a fifth of estimates in 2011.

**Relinquished Areas Part of a £4.4b Project**
The news about the rejected development of the nine license areas comes only a year and a half after BP invested $7.2 billion (£4.4 billion) into the project. In February 2011, the British energy company bought a 30 per cent stake in Reliance’s deepwater oilfields in the Bay of Bengal. The deal marked one of the largest foreign investments in India’s history and was in line with Britain’s Prime Minster David Cameron’s plans to build closer trade ties between London and Delhi.

According to some analysts, the fact that so many licence areas have been relinquished signals poor planning and deal making from BP’s side. Oil and gas analyst at Kotak Institutional Equities in Mumbai Tarun Lakhotia told The Times: “It’s been a disappointment. The fact that these blocks have been relinquished does imply that BP overpaid for the joint venture.”

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