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    Brookfield to Acquire Reliance's Pipe Business

Summary

The deal is worth almost $2bn.

by: Shardul Sharma

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Brookfield to Acquire Reliance's Pipe Business

Canada-based asset management firm Brookfield Asset Management will acquire Reliance Industries’ (RIL) Indian gas pipeline business.

India Infrastructure Trust, an infrastructure investment trust (InvIT) set up by Brookfield as sponsor and 90% investor, will acquire Reliance’s East West Pipeline for rupees 130bn (1.9bn), RIL said March 14. As a part of the transaction, the InvIT will acquire 100% equity interest in Pipeline Infrastructure Private (PIPL), which currently owns and operates the pipeline.

The 1400 km East West Pipeline supplies gas from RIL's KG Basin gas fields on India’s east coast to user on India’s west coast. The pipeline is also connected with other pipelines on the route which are operated by Gail and Gujarat State Petronet.  

Following this deal, the existing pipeline usage agreement has been reworked and the reserved capacity reduced to 33mn m3/day against 56mn m3/d. Also, any unutilised capacity payment by RIL will be the difference between rupees 5bn a quarter and actual revenue earned by PIPL. RIL said it will continue to be entitled to transport gas, either by itself or of any customers, free of cost against any outstanding unutilised capacity payments.

At the current approved final tariff of rupees 71.66/mn Btu, if the average volume of gas transported is 22mn m3/d, RIL will not be liable to make unutilised capacity payments, it said.

The next review of tariff in April 2020 will also consider upward revision to tariff arising from determination of lower revised capacity of the pipeline. “Considering the new investments in the upstream sector in the KG basin, and the growing LNG imports, ability to swap gas, the average volume expected to be transported through the pipeline is expected to be significantly higher compared to the current levels. RIL will be entitled to a significant participation in the net earnings of PIPL under the mechanism specified in the pipeline usage agreement,” the company said.

RIL will be entitled to a significant participation in the net earnings of PIPL under the mechanism specified in the pipeline usage agreement. RIL’s current investment in preference shares valued at rupees 40bn to continue and will be converted into equity at the end of 20 years. Further at the end of 20 years, RIL has the right to acquire equity shares of PIPL held by the InvIT at an equity value of rupees 500mn.

Brookfield has been an avid acquirer of midstream gas assets worldwide. In the past two years it committed $5.6bn to buying key pipeline interests in South America from Petrobras and Spain's Naturgy, while in July 2018 it agreed to buy Enbridge's western Canadian gas gathering and processing business for C$4.31bn (US$3.3bn) cash. In contrast Brookfield was on the sell-side of a recent Australian upstream deal.