OVL to buy COP's 8.4% stake in Kashagan field for $5 bn

In its biggest acquisition ever, state-owned Oil & Natural Gas Corp (ONGC) has agreed to buy US energy giant ConocoPhillips' 8.4 percent stake in the Kashagan oilfield in Kazakhstan for about USD 5 billion.

ONGC Videsh Ltd, the overseas arm of the state explorer, will pay a base price of USD 4.25 billion plus a share of working capital and other cash calls together with interest for the 8.4 percent stake in the field that produces 370,000 barrels per day (18.5 million tons a year) of crude oil.

This will be the biggest acquisition by OVL, surpassing its USD 2.2 billion buyout of Russia-focused Imperial Energy in January 2009.

It will be the biggest acquisition by an Indian company this year, and the sixth largest in the history.

OVL is seeking oil and gas properties overseas to meet the nation's rising energy needs. India last year spent USD 140 billion on import of crude oil.

The stake buy in Kashagan field is subject to approval of governments of Kazakhstan and India and also to other partners in the Caspian Sea field waiving their pre-emption rights.

Italy's Eni, Royal Dutch Shell, France's Total, ExxonMobil and KazMunayGas have 16.81 percent stake each, while Inpex of Japan has the remaining 7.56 percent.

Industry sources said ExxonMobil and Shell are seeking bigger stakes in the Kashagan oil field and operating control before starting to expand the project.

OVL concluding the deal would depend on the two firms waiving their right of first refusal (ROFR) or pre-emption rights.

Kashagan, the biggest world oilfield discovery since 1968, holds an estimated 30 billion barrels of oil-in-place, of which 8-12 billion are potentially recoverable. Plans have already been firmed to ramp up output to 450,000 bpd (22.5 million tons per annum).

ConocoPhillips (COP) and OVL in separate but almost identical statements said the deal is expected to close in the first half of next year.

"The acquisition would mark OVL's entry into the largest oil proven North Caspian Sea of Kazakhstan. From Phase 1, the acquisition is likely to add an average annual production of about 1 million tons for a period of over 25 years with a peak of about 1.6 million tons," OVL statement said in New Delhi on Monday.

When Phase 2 and 3 are implemented, the OVL's share will be significantly higher.

This will be OVL's second acquisition this year. It had a couple of months back bought stake in a group of oil fields in Azerbaijan for about USD 1 billion.

Deals bigger than the one announced today include Tata Steel's USD 12.2 billion takeover of European steel giant Corus, Vodafone taking over controlling stake in Hutch-Essar from Hutchison for about USD 11 billion and Bharti Airtel's acquisition of Zain Telecom's African assets for about USD 10.7 billion.

Billionaire Anil Agarwal-led Vedanta Group's USD 8.6 billion acquisition of Cairn India is fourth and Hindalco Industries' buyout of Canadian firm Novelis Inc for USD 6 billion is fifth biggest.

COP expects proceeds of USD 5 billion, including the purchase price and expected working capital and closing adjustments, according to a statement from the Houston-based company.

Deals announced this year include Hinduja Group firm Gulf Oil Corp's acquisition of US-based speciality chemicals maker Houghton International Inc for USD 1.045 billion.

Last month, Indian Hotels Co offered USD 1.86 billion to buy Hamilton, Bermuda-based Orient-Express Hotels Ltd.

Besides, Rain Commodities reached an agreement this year to buy Belgium-based speciality chemicals group Ruetgers in a USD 918 million deal.

"OVL has finalised definitive agreements for the acquisition of the 8.4 per cent participating interest of ConocoPhillips in the North Caspian Sea Production Sharing Agreement (NCS PSA) that includes the Kashagan field, in Kazakhstan," the company statement said.

The acquisition, subject to relevant government, regulatory approvals, priority rights and consortium pre- emption rights, is expected to close in the first half of 2013.

The Kashagan Field, located in the shallow waters (about 5 meters to 8 meters) of the Kazakh North Caspian Sea, is the world's largest current development project.

The acquisition also bears a significant strategic importance for India in terms of contributing towards its energy security.

OVL under the Perspective Plan 2030 is targeting oil and gas production of 20 million tons of oil and oil equivalent gas by FY'18 from current 8.75 million tons. This is to rise to 60 million tons by FY'30.

Goldman Sachs was OVL's financial advisor; Allen & Overy, legal advisor; E&Y, tax and accounting advisor and bayphase, technical advisor.

COP said the carrying value of the assets related to its Kashagan interest was about USD 5.5 billion as of 30^th September.

Further, it will take an after-tax impairment of about USD 400 million in the fourth quarter to reduce the carrying value.

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

The firm, which is looking to generate USD 8 billion to USD 10 billion from divestments by the end of 2013, has raised USD 2.1 billion from asset sales this year.

Following the completion of the deal, COP will have sold about USD 7 billion of assets from 2012 to 2013.

COP is in the midst of a three-year repositioning aimed at improving its balance sheet and making itself more attractive to investors.

That plan includes the sale of USD 15 billion to USD 20 billion in assets, large-scale share buybacks and the spin-off of its refining arm earlier this year to Phillips 66 PSX.

It said the disposition programme has yielded proceeds of USD 2.1 billion till 30^th September