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

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India Bets on Troubled Kashagan to Restart Oil Expansion

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Photographer: Nariman Gizitdinov/Bloomberg

India’s largest oil explorer is attempting to revive a stalled overseas expansion plan by buying into a $46 billion project that’s eight years behind schedule and cost twice as much as expected.

Oil & Natural Gas Corp. (ONGC) announced the company’s biggest overseas acquisition yesterday, the $5 billion purchase of ConocoPhillips (COP)’s 8.4 percent stake in Kazakhstan’s Kashagan project. Touted as the biggest find since the 1960s when it was discovered in 2000, the field beneath the Caspian Sea is expected to produce 370,000 barrels a day from next year.

For ONGC, as the state-controlled producer is known, the deal signals an acceleration in overseas acquisitions as the New Delhi-based producer spends 11 trillion rupees ($198 billion) by 2030 to increase production at home and abroad. Deals slowed after completing the $2.2 billion purchase in 2009 of Imperial Energy Corp., a U.K. company with fields in Siberia where production started to decline quickly.

“The worst for the Kashagan field, including the delays, is behind everyone,” D.K. Sarraf, managing director of ONGC Videsh Ltd., the company’s overseas unit, said in an interview. “The future of this really large field is good. We’re fully prepared to participate in the field, including expansion.”

ONGC fell 0.1 percent to 249.75 rupees at the close in Mumbai. It rose as much as 1.6 percent earlier. The shares have declined 2.7 percent this year, compared with a 22 percent gain in the benchmark Sensitive Index. (SENSEX)

First Refusal

The Kazakh government and project partners including Exxon Mobil Corp. (XOM) and Eni (ENI) SpA have the right of first refusal on the sale, according to yesterday’s statement. The Central Asian nation will consider buying Conoco’s stake and has two months to decide, Oil and Gas Minister Sauat Mynbayev said in the capital, Astana, today.

After completing the first phase of the project, the Kazakh government and partners in Kashagan must decide on whether to expand the project to 1 million barrels a day, a commitment that would cost tens of billions of dollars. Drilling at the field is complicated by winter temperatures that freeze the Caspian and an oil reservoir that contains lethal gas.

“Fields of Kashagan’s size are always a challenge and ONGC’s experience from Imperial hasn’t been the best, so hopefully they’ve learnt from that,” said Kamlesh Kotak, Mumbai-based vice president of research at brokerage firm Asian Markets Securities Pvt. “Running the field at full potential is going to be a challenge. Having been beaten by the Chinese in the past, ONGC has to do all it can to get what it can now.”

Largest Field

In September, ONGC agreed to spend $1 billion to buyHess Corp. (HES)’s 2.7 percent stake in Azerbaijan’s largest oil field and an associated pipeline. BP Plc, the operator of the Azeri- Chirag-Guneshli fields, has been criticized by the Azeri government for a faster-than-expected decline in production.

ONGC scrapped a plan to revive production from Imperial’s fields just months after completing the purchase of the company because the fields didn’t perform as expected. The Indian company this year backed away from buying a 25 percent stake in a second Russian producer, OAO Bashneft, because they couldn’t agree on a price.

“One wrong experience with Imperial should not stop ONGC from sourcing other deals, provided utmost care is taken,” said Niraj Mansingka, a Mumbai-based analyst with Edelweiss Securities Ltd. “Their cash flow is positive, hardly any debt and they plan to raise production overseas to meet India’s energy demand.”

China Versus India

China has been more aggressive than India in pursuing overseas oil and gas acquisitions as the world’s most populous nations look for oil fields to meet soaring energy demand.

China’s Cnooc Ltd. (883) offered $17 billion for Canada’s Nexen Inc. this year. China Petrochemical Corp. bought Addax Petroleum, based in Canada and focused on Africa and the Middle East, in 2009 for $8.9 billion. By contrast, India’s biggest prize before yesterday’s deal was Imperial Energy.

ONGC produced 8.75 million tons (about 175,000 barrels a day) overseas in the year ended in March. The company wants to produce 60 million tons by 2030 by investing in fields outside India.

India consumed 3.5 million barrels of oil a day in 2011, up 3.9 percent from the previous year, according to BP Plc (BP/)’s Statistical Review of World Energy. Only the U.S., Japan and China consumed more.

First Half

ConocoPhillips and ONGC Videsh expect to close the deal for a stake in the North Caspian Sea Production Sharing Agreement in the first half of next year, according to a statement yesterday.

North Caspian Sea Operating Co. operates Kashagan. The partners include Eni, Exxon Mobil, KazMunaiGaz, Shell and Total SA (FP), each with 16.8 percent, according to ConocoPhillips’ website. Japan’s Inpex Corp. (1605) has 7.6 percent.

BG Group Plc agreed in 2003 to sell its 16.7 percent stake in the project to China Petrochemical Group and Cnooc for $1.23 billion. Total, Exxon, Shell, Conoco, Eni and Kazakhstan’s national oil company countered that agreement by exercising rights to buy the holding on a pro-rata basis. That deal was completed in 2005.

The budget for the first phase may almost double to $46 billion by the time oil is exported, a person with knowledge of the matter said in January. An early cost estimate put the tab at about $24 billion and the first production was originally expected in 2004.