OVL’s $5-bn Kazakh deal faces hurdle

Almost a month after it announced its biggest acquisition, ONGC Videsh Ltd (OVL) is facing a roadblock.

The company had planned to invest around $5 billion to acquire ConocoPhillips’ 8.4 per cent stake in Kazakhstan’s Kashagan field. But KazMunaiGaz National Co, the Kazakh state energy producer, has said it will decide within two months on acquiring a stake in the project that ConocoPhillips intends to sell to OVL. According to the Kazakh law, the government gets priority to buy any oil asset for sale in its territory. The government passed the law in 2005, before using the right to buy half of BG Group Plc’s stake in Kashagan.

“The company is considering this question,” Malik Salimgereyev, managing director of Kazakh sovereign wealth fund, Samruk-Kazyna, told reporters in Astana, the country’s capital. Samruk-Kazyna owns the national energy producer. Bloomberg quoted KazMunaiGaz as saying that it would borrow internationally to fund the acquisition if it decided to exercise its rights to the stake.

When contacted, OVL Managing Director D K Sarraf said: “All the existing shareholders in the field have the first right of refusal, including KazMunaiGaz. One or more of them can exercise the first right of refusal. We will have to wait and watch. We have been working on this deal for months and thus we would want this deal to go through.”

Sarraf added the first right of refusal available with the existing partners was 60 days and then another 180 days with the government to grant approval. After that, OVL would begin work on mobilising resources for the $5-billion deal to fructify.

Other than KazMunaiGaz, Kashagan’s consortium partners are Eni, Total, Shell and ExxonMobil — each with 16.81 per cent stake, while ConocoPhillips has 8.40 per cent and Inpex 7.56 per cent participating interest.

Last month, OVL said it had finalised definitive agreements for acquisition of ConocoPhillips’ 8.4 per cent participating interest in the North Caspian Sea production-sharing agreement that included Kashagan field. The deal is expected to be closed during the first half of next calendar year.

NYSE-listed ConocoPhillips is the third-largest energy company in the US.

This could also be a dampener for the plans of ConocoPhillips, which had, while announcing the deal, said: “The proposed sale would increase value for shareholders through focused capital investments and a commitment to deliver growth in production and cash margins, improved returns on capital, and sector-leading shareholder distributions.”

OVL, with its 8.4 per cent stake, planned to get 315,000 tonnes of oil in the first year. The share would go up to 4.2 million tonnes a year in 2028 when all the three phases of the field have been fully developed.

The acquisition would mark OVL’s entry into the largest oil-proven North Caspian Sea of Kazakhstan. The Kashagan field, located in the shallow waters of the Kazakh North Caspian Sea, is the world’s largest current development project.

The stake buy would help OVL offset the drop in output from its assets in Syria and Sudan, which had brought its total output down by seven per cent in 2011-12.

Considered the biggest find so far, the Caspian Sea field is expected to produce 370,000 barrels a day from next year. Developing the field would cost tens of billions of dollars, or more.

If the deal does go through, it would be the second big-ticket acquisition for OVL after Imperial Energy, which it acquired for $2.1 billion in 2009.

Article sourced from the Business Standard

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ONGC Videsh eyes stake in Kashagan

On November 26, Kazakh media reported that the US oil company ConocoPhillips was planning to sell its 8.4% stake in Kazakhstan’s Kashagan oil field on the Caspian Sea. In the context of continuously falling revenues (in the third quarter of 2012, ConocoPhillips lost about 14% of its profits, earning slightly over US$15 billion), its top managers decided to retrieve the money invested in a number of energy assets abroad. 

According to some estimates, such an operation would consist of the sale of $20 billion worth of assets the world over by the end of this year. India’s ONGC Videsh Ltd, which is part of the state-owned Oil and Natural Gas Corporation, was named as the potential buyer of ConocoPhillips’ stake in the largest oil field to be discovered during the last 30 to 50 years. 

Should this deal be successfully concluded between the two companies in early 2013, the Indian government might gain long-term access to Kazakhstan’s lucrative oil and gas industry for about $5 billion. 

On the following day, Kazakhstan’s Oil and Gas Minister Sauat Mynbayev, who has been closely involved in Kashagan-related negotiations for over five years, stated that the deal could not be considered definitive until it obtained the approval of a special state commission. 

Under Article 12 of the law on subsoil use, whose upgraded version was adopted by the parliament in June 2010, Kazakhstan’s government enjoys a pre-emptive right to acquire stakes in oil, gas and other mineral deposits. This article also provides the government specific purchasing privileges relative to other stakeholders, in order to “preserve and strengthen the resource and energy basis of the national economy”. 

Furthermore, even should the government abstain from declaring its intention to buy up ConocoPhillips’ stake, such an expression of interest is possible on behalf of other North Caspian Operating Company (NCOC) participants, including ExxonMobil, Royal Dutch Shell, Total, Eni and Inpex. The joint venture NCOC was created in 2008 and operates the Kashagan field as well as other energy resources. 

In early October, speaking at the KAZENERGY Association’s annual meeting, KazMunaiGaz (KMG) chairman Lyazzat Kiinov said his company might be interested in acquiring Conoco’s 8.4% share in Kashagan, in compliance with its growth strategy designed to make KMG one of the world’s 30 largest energy companies. 

In February 2012, Kazakhstan’s President Nursultan Nazarbayev already decided to unblock $4 billion from the National Fund for the purpose of supporting KMG’s commercial plans (the National Fund currently contains over $47 billion of reserve money collected from the oil and gas revenues). This gesture could be largely interpreted as an indication of Kazakhstan’s willingness to increase its participation in the Kashagan oil field, only a few years after KMG had already boosted its weight (in 2008, KMG increased its stake from 8.33% to 16.8%). 

In August 2012, it was reported that two of the NCOC members, ExxonMobil and Shell, were also seeking to increase their respective stakes as well as to extend the term of the production-sharing agreement for another 20 years. According to undisclosed sources working in the consortium, both companies were even ready to exit the project unless their demands were met by the Kazakhstani Government. 

While the purchase of ConocoPhillips’ stake is theoretically possible both for KMG and any of its Kashagan partners, either of these scenarios has serious drawbacks. Sergey Smirnov, an Almaty-based expert of the Institute of Political Solutions, believes that KazMunaiGaz would be unable to offer a competitive price, given its already wide-ranging portfolio of investments into various energy projects. 

According to Smirnov, even if KMG used the National Fund’s money to take over Conoco’s share, it would be hard pressed to bear the burden of additional expenditure related to the first phase of production. In May 2012, its cost was once again upgraded from $38 billion to $46.3 billion, while the initial estimates made by Italy’s Agip back in 2005 hardly amounted to $5 billion. 

As regards a potential bid from a Western stakeholder in Kashagan, it may be expected that neither of the consortium’s largest members would be glad to see any of its partners control as much as 25% in the NCOC. Therefore, the Western energy companies may collectively prefer to accept a new participant in the NCOC with a minor share. 

While ONGC’s deal with ConocoPhillips stills needs to be notified to the government of Kazakhstan and subjected to double approval – formally from the state authority and informally from the consortium – there is already also much speculation about the potential involvement of Chinese oil companies. In August 2012, Energy Intelligence Group reported that the China National Petroleum Corporation (CNPC) had hired the Hong Kong-based CITIC Resources Holdings Ltd to conduct talks with both ExxonMobil and Shell about the purchase of their respective shares in Kashagan in the name of the Chinese oil giant. 

Although neither of the Western companies earnestly considered a possibility of exiting Kashagan, it became clear that China was ready to pay for its right of entry. Kazakhstan-based energy expert Olzhas Baidildinov believes that the announcement of the ConocoPhillips-ONGC deal might only whet China’s appetite. 

Even though Kazakhstan may be interested in attracting India’s capital and thus diversifying its commercial relations, Beijing’s technical expertise in oil production still remains largely superior to that of New Delhi. Moreover, in the case of additional legal problems with Western oil companies, China’s CNPC could provide enough money to compensate for their eventual exit without compromising production. 

Currently, Kashagan is regarded as one of the most promising oil fields in the world. Its total oil reserves are estimated at 38 billion barrels or six billion tonnes, out of which 10 billion barrels are lying at levels directly accessible to contemporary drilling methods. 

Furthermore, this supergiant field may conceal up to one trillion cubic meters of natural gas. In late August 2012, CNN Money ranked Kashagan as the world’s most expensive energy project, worth around $116 billion.

Article sourced from Asia Times

ONGC to buy ConocoPhillips’ Kazakh oilfield stake for $5 billion

ConocoPhillips said it plans to sell its 8.4 per cent stake in Kazakhstan’s giant Kashagan oilfield to Oil and Natural Gas Corporation Ltd (ONGC) for about $5 billion as the Indian company looks to make up for flagging production.

Kashagan, the world’s biggest oilfield discovery since 1968, holds an estimated 30 billion barrels of oil-in-place, of which 8-12 billion are potentially recoverable. First production from the field is expected in 2013.

India, the world’s fourth-biggest oil importer, buys nearly 80 per cent of its oil needs as expanding refining capacity has outpaced local oil output. State-run ONGC’s local oil output has been almost stagnant for years.

ConocoPhillips said the carrying value of the assets related to its Kashagan interest was about $5.5 billion as of Sept. 30.

The company said it would take an after-tax impairment of about $400 million in the fourth quarter to reduce the carrying value. The deal is expected to close in the first half of 2013.

ONGC, India’s third-biggest company by market value, has been investing to maintain output from its old fields and has capital spending plans of around 340 billion Indian rupees ($6.12 billion) both this year and next. The company is under pressure from the government to meet rising demand.

The acquisition is the largest ever for ONGC, and marks the biggest outbound deal from India since mobile phone operator Bharti Airtel bought mobile phone operations in 15 African countries for $9 billion in 2010 from Kuwait-based telecoms group Zain.

ONGC Videsh, the arm of ONGC that invests in overseas assets, said the acquisition would likely add 1 million tonnes (20,000 barrels per day) to its annual production over 25 years with the company’s share of output significantly higher in later stages of development. ONGC Videsh’s production in the year to March 31, 2012 was 8.7 million tonnes.

Kazakhstan, home to 3 per cent of the world’s recoverable oil reserves and the largest former Soviet oil producer after Russia, has sought to revise deals struck with foreign energy companies in the lean post-Soviet years.

ConocoPhillips has been conducting a disposal program to reduce its non-core overseas assets to reduce debt and increase its exploration and dividend budgets.

It has already exceeded its target of asset sales worth $20 billion by the end of 2012, including the sale of its stake in Lukoil, Russia’s second-biggest oil producer.

“(The) purchase price of $5 billion is at the high end of our prior expectation of $4 to $5 billion,” analysts at Simmons and Co wrote in a note to clients.

“This is a positive for ConocoPhillips as it marks important progress on their asset divestiture program, which is needed to support the capital program and dividend.”

ConocoPhillips shares down slightly at $56.39 in early trading.

The company said it notified government authorities in Kazakhstan, and its partners in the North Caspian Sea production-sharing agreement of its intention to sell the stake.

Kazakh oil and gas minister Sauat Mynbayev last month disclosed ConocoPhillips’ plans to sell its stake in the field.

The Kashagan field is jointly controlled by state-run KazMunaiGas and six international companies, including Eni Spa, ExxonMobil Corp, Royal Dutch Shell Plc , Total SA and Inpex Corp.

Article sourced from Times of India