When BP shovelled $ 7.2 billion to pick up a 30 per cent participating interest in over 20 production sharing contract blocks in India that were operated by Reliance Industries, it was hailed as a historic deal.

We were equally elated: not because of the size of the investment but it gave us a glimmer of hope that RIL’s KG-D6 block, which appeared to have foundered because of a wrong strategy, could be rescued after all. The gas discovery that had been touted as the world’s biggest find of 2002 with an estimated reserve between 10 and 11 TCF could benefit from BP’s expertise in deep-water oil and gas exploration.

Sadly, that wasn’t to be. For starters, BP quickly downgraded the reserve of D1, D3 fields of KG-D6 from 11 TCF to 3 TCF. I remember when the news broke I was chatting with an ONGC executive in her New Delhi office. “Why did BP invest so much money in these blocks,” my friend asked. It is a question that I have had to face from more than 50 other people – all of them certain that as a petroleum journalist I would have the answer.

We scouted about for an answer. Several energy experts we spoke with seemed to think that the investment in KG-D6 was a red herring; BP was actually interested in India’s vast LNG market. But this triggered another question:

why should BP invest in PSC blocks to conduct LNG business in India? BP can do LNG business without RIL and its PSC blocks. We were told that Mukesh Ambani’s family-owned East –West gas pipeline could have been the real attraction for BP’s proposed LNG business. This too defied logic because all gas pipelines are operated on common carrier principle and BP could have used that facility to market its LNG.

As we continued our search for the real answer, two acknowledged gas experts with a great deal of experience in India’s gas sector came up with an answer. They put the blame squarely on BP’s chief executive Bob Dudley who, they said, had failed to conduct a proper due diligence exercise. According to their theory, Dudley wanted the investment in India to divert the attention from the Gulf of Mexico disaster. We took this explanation with a large dose of salt and continued our investigation. We do not know Bob Dudley personally but we have learnt through friends in the international oil industry that the BP chief is an outstanding business leader with sound common sense.

We approached a well-known geologist in the UK who is very familiar with the Indian scene. We put the same question to him: what was the logic behind BP’s investment in RIL’s PSC blocks? Prompt came the reply: “I remember being exceptionally surprised at the time that the deal was signed. It was a widely held view that KG-D6 was not the crown jewel it was originally thought to be and that some of the other RIL blocks were low in prospectivity. The downsizing of their asset portfolio to just a handful of blocks has not surprised me. I can only assume that BP was looking at a longer-term picture involving the downstream side of the business. There is, after all, a huge market and demand for energy in India. I always saw the deal as a win-win for RIL and am still scratching my head to comprehend BP’s strategy.”

We then approached an acknowledged Indian energy expert with prolonged international exposure. He dismissed outright the theory that BP had not conducted proper due diligence before making the investment.

“I do not agree with the contention that BP did not do its due diligence even though we know that the boards of several companies are not half as smart as they seem from the outside. For an $ 8 billion investment, the BP board must have made many analysts and consultants shit bricks for many days/months. All analysis in the petroleum industry includes a downside, an upside and the most likely scenario. Different assumptions including different price assumptions are made in these cases,” he said.

BP and its resourceful partner RIL moved heaven and earth to have the Rangarajan gas pricing formula implemented. They had almost succeeded. But Mukesh Ambani’s upstream foray has been dogged by Sisyphean travails – a frustrating endeavour to roll a boulder to the top of the mountain only to find it roll down to the bottom when tantalisingly close to its objective.

That begs a question: Why should RIL-BP have struggled so hard to have the gas price hiked unless the combine stood to make an immense benefit? Even by BP’s reckoning, KG-D6 does not have much gas left to be produced. Remember Dudley’s famous ‘poetic’ imagery of the Coke can and straw? We have never subscribed to the gas hoarding theory which we believe was the creation of geologist P. Gopalakrishnan’s imagination. BP definitely cannot be a party to such deceit which could ruin its reputation.

BP has since written off more than 10 per cent of its investment in India – roughly $ 770 million. However, sources say this could rise significantly. We do not believe that BP and RIL are unduly worried about the gas price announced by the Modi government. There is still a silver lining and all indications are that the package of incentives for gas produced from deep water and ultra-deep water being worked out could, intentionally or unintentionally, still be advantageous to the RIL-BP combine. The very wording of the incentive scheme points towards RIL-BP. Significantly, a senior BP executive came out with a statement offering to help the Modi government decide on these incentives.

We are now close to an answer. Our investigation has narrowed down to two possibilities: 1) There was a quid-pro-quo in the deal that only the two top bosses and, perhaps some Board members, know about; 2) There is gas in the KG basin area in deeper horizons that will need more investment to extract. While D1-D3 have been damaged because of RIL’s lack of expertise, BP is confident that it can extract juice from deeper areas that have so far not been developed and also not relinquished. This requires new capital. A higher gas price would make the consumer pay for this investment.

 We tend to agree with the second possibility without ruling out the first. Former petroleum minister Veerappa Moily suffered from a terrible foot-into- mouth disease; nonetheless, his fatuous statement that the country was floating on gas came to mind. He must have been briefed by BP whose India boss, Shashi Mukundan, a solid guy not known for making misleading statements, wrote a few confidential letters to Moily in those days in which he stated that India had enough gas reserves to meet its demand.

Yes, we now tend to believe that BP’s investment was prompted by its perception about gas reserves in the deeper horizons of KG D6. (We did hint at this possibility in an article written for this column a few months ago). It is an extremely bold decision which only Bob Dudley could have taken. Apart from the possible quantum of reserves, the decision is very risky in many ways which we could examine later.

Let us also not forget the fact that international oil majors are capable of making colossal mistakes. Almost all of them rushed to Vietnam soon after its liberation believing that the country was floating on oil and gas. None of them carried out any due diligence. It was a mad scramble to grab the concessions and almost all of them drew a blank. However, BP saved itself the blushes with the discovery of a medium gas field in which India’s ONGC Videsh is a partner.