Kazakh govt helps CNPC oust ONGC from ConocoPhillips stake deal

State-owned China National Petroleum Corp (CNPC), Asia's largest oil refiner, has managed to oust Oil & Natural Gas Corp (ONGC) from acquiring US oil major ConocoPhillips' 8.33-per cent stake in the giant Kashagan oilfield in the Caspian Sea with the help from the Kazakhstan government.

Under the back-to-back deal, Kazakhstan state-owned oil company KazMunaiGas will now buy ConocoPhillips stake for $5 billion – the same price offered in November 2012 by ONGC's overseas arm ONGC Videsh Ltd (OVL).

KazMunaiGas, in turn will sell the stake to CNPC for around $5.4 billion, marking the Chinese company's biggest overseas acquisition.

The deal was yesterday confirmed by Lyazzat Kiinov, CEO of KazMunaiGas, during a summit of gas exporting nations in Moscow.

In November ConocoPhillips had agreed to sell its stake in the Kashagan oilfield to OVL for $5 billion, a deal which would have been OVL's largest-ever overseas acquisition.

The transaction was subject to Kazakh government approvals as well as the pre-emption rights of Kazakhstan and other stakeholders in the Kashagan oil field, which is jointly owned by KazMunaiGas and six international companies, including Eni, ExxonMobil, Inpex Corp, Royal Dutch Shell, and Total.

The Kashagan partners had two months to exercise their pre-emption rights, which expired in late January, but the Kazakh the government had till 25 May to decide on the deal, but extended the deadline to 2 July.

In early April, local media reported that China was mounting extreme pressure on the Kazakh government for ConocoPhillips' stake in the Kashagan oilfield.

Kazakh President Nursultan Nazarbayev, who has been in office since the country's independence in 1991, had met his Chinese counterpart Xi Jinping and the head of Sinopec on 6 April, offering access to resources in exchange for investment into the Central Asian economy.

China has offered Kazakhstan billions of dollars in loans for infrastructure projects and is building a new railroad across the country and has built a pipeline in 2006 linking Kazakhstan and China, which is currently being expanded to 400,000 barrels a day from 240,000 barrels a day.

Through direct investments and taxes, China and its state-owned energy companies have invested $13 billion in Kazakhstan, with most of it in the energy sector. Chinese companies control 22.5 per cent of Kazakhstan's oil output.

According to a recent report, the share of Chinese companies in the Kazakhstan's hydrocarbon industry will exceed 40 per cent by end 2013, although such reports are difficult to authenticate due to the opaqueness in some deals done by the Chinese in Kazakhstan's oil and gas industry.

Some of the oil blocks are held by relatives of the Chinese party bosses, or top and middle-level governmental officials, who have no qualms in shipping their share of the oil to Europe instead of to their home country.

Although India has had good relations with Kazakhstan, the former Soviet nation is China's biggest trading partner. Its trade with China is almost $28 billion with potential for further growth, say analysts.

Discovered in July 2000, the Kashagan oil field in the Caspian Sea has been described as the largest field found in the past 30 years and the largest outside the Middle East, which will cost around $136 billion to develop.

The field, located in shallow depth of 5-8 metre, is estimated to hold around 38 billion barrels of reserves of oil, of which 13 billion are proved to be recoverable, and 18 trillion cubic feet of gas.

The project is the largest but most complex hydrocarbon development currently being undertaken anywhere in the world, and the consortium has spent an estimated $47 billion in the first phase of development.

The start-up of the project has been delayed since 2005 due to cost overruns and disputes with the Kazakhstan government over taxes.

The project partners are also waiting for the Kazakhstan government's approval of the estimated $100 billion cost of the project's expansion and have demanded an extension of  the production-sharing agreement by 20 years in order to give them more time to recover their investment due to multiple delays and cost overruns over the past decade.

The development of Kashagan represents several technical, supply chain complexity, safety, engineering logistical, environment challenges, high pressure reservoir with dangerous levels of hydrogen sulphide, making it one of the most complex hydrocarbon development currently being undertaken anywhere in the world.

For CNPC, the deal comes just two months after it acquired Italian oil and gas major Eni SpA's 20 per cent stake in a Mozambique natural gas field for approximately $4.2 billion. (See: CNPC acquires Eni's 20 % Mozambique gas stake for $4.2 bn)