India's largest oil explorer is attempting to revive a stalled overseas expansion plan by buying into a US$46 billion (Dh168.96bn) project that is eight years behind schedule and cost twice as much as expected.
Oil & Natural Gas Corporation (ONGC) announced the company's biggest overseas acquisition on Monday, the $5bn purchase of ConocoPhillips's 8.4 per cent 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, the deal signals an acceleration in overseas acquisitions as the producer spends 11 trillion rupees (Dh727.27bn) by 2030 to increase production at home and abroad. Deals slowed after completing the $2.2bn purchase in 2008 of Imperial Energy, a UK company with fields in Siberia where production declined quickly.
"The worst for the Kashagan field, including the delays, is behind everyone," said DK Sarraf, the managing director of ONGC Videsh, the company's overseas unit. "The future of this really large field is good. We're fully prepared to participate in the field, including expansion."
The Kazakh government and project partners including ExxonMobil and Eni have the right of first refusal on the sale, according to ONCG.
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.
"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, the vice president of research at the brokerage firm Asian Markets Securities. "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."
ONGC scrapped a plan to revive production for Imperial's fields just months after completing the purchase of the company. "One wrong experience with Imperial should not stop ONGC from sourcing other deals, provided utmost care is taken," said Niraj Mansingka, an analyst with Edelweiss Securities. "Their cash flow is positive, hardly any debt and they plan to raise production overseas to meet India's energy demand."
The budget for the first phase may almost double to $46bn by the time oil is exported, a person with knowledge of the matter said.
An early cost estimate put the tab at about $24bn and the first production was originally due in 2004.