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