OVL to buy Anadarko’s 10% stake in Mozambique block for $2.6 billion

Mumbai/ New Delhi: ONGC Videsh Ltd (OVL), the foreign arm of state-run ONGC, on Monday announced signing of a definitive agreement with US firm Anadarko to buy 10 per cent of its stake in a gasfield offshore Mozambique for $2.64 billion in cash.

The latest acquisition, which will take the combined holding of OVL and Oil India in the field to 20 per cent (worth $5.11 billion), will increase OVL’s reserve and resource base significantly. This is expected to boost the firm’s production — eight million tonnes of oil & oil equivalent gas at present — and help it meet its long-term targets of 20 mt by FY18 and 60 mt by FY30. Thanks to its recent discoveries in the Rovuma offshore field, the company is touted to become one of the world’s largest liquefied natural gas (LNG) -producing hubs by 2018. The field is said to be the largest gas discovery off Africa’s east coast with estimated recoverable reserves of 35-65 trillion cubic feet (tcf).

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OVL Managing Director D K Sarraf told Business Standard the deal was a strategic investment for the country, with Indian companies together holding a 30 per cent stake in the offshore block. Bharat Petroleum Corp Ltd (BPCL) holds a 10 per cent stake. “The field is not far from India, so the LNG transportation cost will be very cheap. We will start getting gas from 2018 which will help revive gas-based downstream investment in the country.”

Though the OVL deal was sealed after prolonged discussions, at a valuation of $5.11 billion, the 20 per cent stake is being seen as a more prudent investment than BP’s acquisition of a 30 per cent stake in Reliance Industries Ltd’s (RIL’s) 21 Indian blocks for $7.2 billion. Of the 21 blocks, 15 were surrendered due to poor hydrocarbon reserves.

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Sarraf and bankers said the valuation of the OVL deal was very competitive. On a comparison with RIL, Sarraf said: “I would not like to compare it with BP-RIL. Every exploration & production asset has its own risk and reward perception. Since the Mozambique field is fully discovered, there is no risk.”

In February 2011, when BP had bought a stake in RIL’s blocks for $7.2 billion, besides further performance-related payments of up to $1.8 billion, analysts had valued the deep-water assets between $24 billion and $30 billion. BP is said to have paid $7.2 billion, including $2.5 billion towards goodwill; $4.5 billion for the K-G block and another $200-300 million for the rest of the blocks.

Given that BP has already taken a substantial write-off on the assets and the RIL-BP consortium has relinquished a majority of the blocks, analysts say BP did overpay. In a July 2013 presentation, Bob Dudley, BP’s group chief executive, said: “We are working with RIL to rigorously manage KG-D6 base production to maximise recovery and increase production. We are also planning development of around three tcf of existing discoveries.”

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Production from the KG-D6 asset has seen a significant downgrade — from 10 tcf to around 5.5 tcf. “While BP farmed into an explored block with reserve certification in place, OVL neither has a producing asset nor reserve certification. The LNG plans have also not happened. So, by that account, it can be said OVL has paid a premium. Besides, no one knows the kind of returns OVL will get from this asset, as production will begin five years down the line,” said a senior research analyst at a domestic brokerage.

Industry experts said, while oil majors like Royal Dutch Shell and Chevron Corporation were also in the race for a stake in the Mozambique block, they found the asking price too high. “But in such deals, Royal Dutch Shell usually seeks to be the operator. Besides, the sellers are usually more comfortable with national oil companies, given their track record and experience,” said an investment banker, asking not to be named.

OIL and OVL had in June announced the purchase of Videocon Mauritius Energy Ltd’s 10 per cent stake for $2.47 billion. Anadarko, the stake of which will come down to 26.5 per cent, will remain the operator in the project. Besides BPCL, other partners in the project are: Empresa Nacional de Hidrocarbonetos of Mozambique (15 per cent), Mitsui and Co Ltd of Japan (20 per cent) and PTT Exploration and Production Public Co Ltd of Thailand (8.5 per cent).

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The acquisition, however, is subject to the approvals of the governments of Mozambique and India, relevant regulatory approvals, pre-emption rights and other customary conditions. The transaction is subject to usual closing conditions and has long stop date of February 28, 2014.

“The acquisition of an interest in Area 1 would mark OVL’s entry into this emerging world-class offshore gas basin with significant future upside potential. It is consistent with the company’s quest for addition of high-quality international assets to its existing E&P portfolio,” the company statement said.

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OVL Chairman Sudhir Vaudeva said in a statement: “As a result of both transactions, OVL will own a significant interest in this strategic project. Area 1 has potential to become one of the world’s largest LNG projects and today’s acquisition marks a further significant step by OVL/ONGC towards the energy security of our country.”

As of 2011, OVL had invested $17 billion in 32 assets in 15 countries. It has struck deals worth over $11 billion over the past year. Last September, the company had bought Hess Corp’s 2.7 per cent stake in Azerbaijan’s largest oilfield and an associated pipeline for $1 billion.