ONGC
Videsh eyes stake in
Kashagan By Georgiy Voloshin
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
Georgiy Voloshin is an analyst
at The Central Asia-Caucasus Institute & Silk
Road Studies Program of John Hopkins University
and a researcher for Wikistrat, a geopolitical
consultancy. He is also an Executive Advisory
Board Member of Paratus Europe Ltd, a strategic
management and business consulting firm.
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