Mumbai, Dec. 4: Oil prospecting is a game of Russian roulette—you hit pay dirt or get blown apart. But ONGC Videsh is either an intrepid prospector or a foolhardy investor: it is prepared to roll the dice by stacking the odds against itself.
Consider this: ONGC Videsh is currently discussing the possibility of investing $ 1.1 billion in the Kurmangazi oil field in Kazakhstan. The level of investment is about the same it stumped up for a stake in Russia’s Sakhalin oil field a few years ago.
ONGC Videsh has been forging high value deals—the latest being the deal in Sudan—ever since it picked up a stake in the Sakhalin–I project where it invested about $ 1.7 billion. Oil and gas production from this field is expected to commence in 2005–06 and achieve plateau production level of 200,000 barrels of oil and 900 million standard cubic feet of natural gas per day. Under the arrangement, ONGC Videsh will bear 20 per cent of the cost and get 20 per cent of the oil and gas production.
Oil prospecting is hugely risky and investors usually try to dredge up as much seismic and other data as possible to minimise the risks. So, what is ONGC Videsh banking on in the Kurmangazi oil field in Kazakhstan' Zilch, to say the least.
There’s no real seismic data to go on. “The estimated oil reserves in Kurmangazi widely vary, ranging from 150 million tonnes to 1 billion tonnes. However, at present only limited seismic data is available for evaluation of the prospect,” says a resume of a meeting of the empowered committee of secretaries that was held on September 13 to discuss ONGC Videsh’s proposed initiatives in Kazakhstan.
The ball was lobbed to the ECS because the level of investments in a clutch of oil and gas projects—Kurmangazi and Alibecmola—would far exceed the authorised limits of the ONGC Videsh board and would “fall within the purview of the ECS”.
Like all oil prospectors, ONGC Videsh has fallen prey to herd mentality. Its investment initiative in Kurmangazi is predicated on the fact that it is based in the Caspian Sea “where a super giant oil discovery has been made in the Kashagan field.” Kurmangazi is the next largest structure in the Caspian Sea after Kashagan—but very few have ventured out there. Reason: not much exploration activity has been undertaken in the past due to the boundary disputes between Russia and Kazakhstan.
So, how is ONGC Videsh loading the dice against itself' Here’s how: the Kurmangazi project is a 50:50 joint venture between the Kazakhstan government and Rosneft, the Russian national oil company, in May this year.
In June, when Prime Minister Atal Bihari Vajpayee visited Almaty, the Kazakh capital, he raised the possibility of ONGC Videsh picking up a stake in the Kurmangazi project during talks with Kazakh President Nursultan Nazerbayev. The ONGC Videsh MD followed that up with talks with Kazakh officials who were prepared to offer 10 per cent in the venture but with the pre-condition that the Indian company would have to bear the entire exploration cost that the Kazakhs would otherwise have had to foot.
ONGC Videsh is now mulling whether it will be viable to acquire a 10 per cent stake after stumping up $ 1.1 billion. In oil prospecting, the second comer always has to bear a higher burden of the cost. But under the Kazakh offer, ONGC Videsh will end up shouldering the entire burden of the risk and the cost on the Kazakh side.
But that’s not all. ONGC Videsh sincerely believes it is on to a really good investment. So it has opened up talks with the Russians too to pick up a part of the stake they hold in the Kurmangazi project. The Russians are clever: if the exploration proves that there are sufficient oil reserves that can be commercially exploited, they will divest a part of their stake for an astronomical sum.
ONGC Videsh loves such make-or-break deals: so it is ready to strike a similar deal for the other Kazakh project for the discovered fields of Alibecmola and Kozashai. Based on present assessments, Alibecmola and Kozashai together would produce 4 million tonnes a year. This oil project is also a joint venture between Canada-based Nelson Resources which has a 50 per cent stake and KazMunayGaz, the Kazakh national oil company which holds the rest.
Under the existing agreement, Nelson Resources has to fund the entire project cost which is around $ 250 million. Nelson Resources is now in talks with ONGC Videsh to bankroll the entire project cost in exchange for a 15 per cent stake in the project.
The ECS was informed that Elf Totalfina of France is vying with ONGC Videsh to pick up the stake in both the Alibecmola discovered field and the Kurmangazi exploration block.
In fact, ONGC Videsh MD Atul Chandra has said the economics of participation in the Alibecmola project isn’t such a great issue. “Safeguarding the investments by suitable provisions in the contract and the sanctity of the contract itself is a major issue which would need to be examined,” the note says.
The committee of secretaries, which discussed the proposals, felt that ONGC Videsh ought to get a foothold in Kazakhstan, an oil-rich region, and the opportunity should not be allowed to slip away.
R. Sikri, the additional secretary (ER) in the ministry of external affairs, reckoned that “too narrow a view of the techno-economics of the project should not be the sole determining criterion,” according to the note. He also felt that the Nelson Resources should be persuaded to offer a 15-20 per cent stake instead of 15 per cent in the Alibecmola oil field..
Two other views expressed at the meeting are pertinent: Surajit Mitra, JS&FA in the ministry of petroleum and natural gas, said the Alibecmola project did not have a high degree of risk unlike the Kurmangazi block where ONGC Videsh was being asked to bear 50 per cent of the cost which would be like risk capital unlike the loan in the case of the discovered field.
R. C. Mahajan, joint advisor to the Planning Commission, felt that if ONGC Videsh was agreeing to carry 50 per cent risk in the Kurmangazi project and 100 per cent in the Alibecmola discovered oil field, then it must try to get the operatorship or have greater control in the management of the project. Its role should not be limited to merely financing the project.
That makes eminent sense but then the Indian oil major has never shown it in the past. When ONGC brought Reliance and Enron on board at the Panna-Mukta oil fields in Bombay High, it conceded the operatorship to the American energy giant. When Enron virtually went financially bankrupt early this year after becoming embroiled in a massive accounting scam, it sold its stake in the Indian oil field to British Gas. ONGC, which has a 40 per cent stake in the field as against 30 per cent each held by British Gas and Reliance, it still is unable to assert its right to operatorship.
The big question: will it assert that right in the Kazakhstan' Not likely—which means it will be playing with a loaded dice it has itself devised. That’s a big gamble—whether its roulette, black jack or just plain oil prospecting.