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ONGC to replace ConocoPhillips in Kashagan project

ONGC and ConocoPhillips closed deal on $5 billion

November 26th, 2012, ConocoPhillips and the Indian national OIL and Natural Gas Corporation Videsh Ltd (ONGC) have agreed on a transfer of interests in the North Caspian Production Sharing Agreement (NCPSA).

Signed on the base of $5 billion in cash, the deal opens ONGC the access to the famous giant Kashagan project located in the north of the Caspian Sea in Kazakhstan territorial waters.

In parallel ConocoPhillips is progressing in its targets to sell $10 billion of non strategic assets by 2013. 

Since Prudhoes Bay in Alaska in 1960s, Kashagan is the largest oil field discovered since then with reserves in place estimated to 38 billion barrel of oil equivalent (boe) or 6 billion tonnes.

From these 38 billion boe, 10 billion  boe are considered as recoverable reserves with actual conventional techniques.

In 1997, a consortium took form to explore and develop this offshore field of crude oil in the Caspian Sea.

In 2000, the first wells hit oil and confirm the potential of the field but in the same time the appraisal campaign revealed all the challenges of the project:

 – Reservoir complex and fragemented

 – Harsh winter conditions with ice packs hazards

 – Extremely high concentration of dangerous hydrogen sulfide

– Very high pressure in the reservoir as lying just two and half miles below the Caspian Sea bed.

In 2004, the development of Kashagan by the consortium is approved by Kazakhstan Government with the commercial production expected to start in 2008.

At that time the capital expenditure for the complete development of Kashagan field were estimated to $57 billion.

Because of its size, complexity and costs, the consortium was formed with a large panel of the most experienced companies with respective working interests as following:

 – Eni 16.8% is the operator

 – ConocoPhillips 16.8%

 – ExxonMobil 16.8%

 – Shell 16.8%

 – Total 16.8%

 – KazMunaiGas (KMG) 16.8%

At that time the partners were targeting a production of 1 million b/d of crude oil to be ramped up in a second phase to 1.5 million b/d.

Eni, ExxonMobil, Inpex, KMG, ONGC, Shell, and Total to start first operations in Kashagan in 2013

But in 2008, little progress was made and the capital expenditure for the complete development of the Kashagan field were ballooning to $187 billion causing internal discussions among the partners and the role of the operator.

The outcome of this table round was that:

 – The creation of the joint venture North Caspian Operating Company

 – KMG took over 50% of the interests of the new company, while the other partners were reducing their share respectively from 16.8% to 8.4%.

 – Shell should become the operator when Kashagan would turn into production actually planned in 2013.

 – The new targeted level of production is established to 450,000 b/d of crude oil in a first phase and 1 million b/d in the second phase.

Since then KMG sold 7.56% shares to Inpex from Japan to introduce a new partner in the consortium, all tyhe other partners remaining with 8.4%.

If the start up is still planned in 2013 after engaging $46 billion capital expenditure, the second phase should be postponed in waiting for the resolution of tax issues requested by the Kazakh Government.

In this context, ConocoPhillips had announced in September to be selling its stake of 8.4%, but obvioulsy none of the actual partners in the joint venture wanted to increase their share in the project.

Based on $5 billion, the deal is positive for both companies, ConocoPhillips will now concentrate on developed countries, Australia, Norway, USA while  ONGC as a national company is lining up at fairly good price for the access to giant reserves at the scale of India’s needs.

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