India Bets on Troubled Kashagan to Restart Oil Expansion

India’s largest oil explorer is attempting to revive a stalled overseas expansion plan by buying into a $46 billion project that’s eight years behind schedule and cost twice as much as expected.

Oil & Natural Gas Corp. (ONGC) announced the company’s biggest overseas acquisition on 25 November, the $5 billion purchase of ConocoPhillips (COP)’s 8.4 percent 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, as the state-controlled producer is known, the deal signals an acceleration in overseas acquisitions as the New Delhi-based producer spends 11 trillion rupees ($198 billion) by 2030 to increase production at home and abroad. Deals slowed after completing the $2.2 billion purchase in 2008 of Imperial Energy Corp., a U.K. company with fields in Siberia where production started to decline quickly.

Winter Freeze

After completing the first phase of the project, the Kazakh government and partners in Kashagan, including Exxon Mobil Corp. (XOM)and Royal Dutch Shell Plc (RDSA), must decide on whether to expand the project to 1 million barrels a day, a commitment that would cost tens of billions of dollars. Drilling at the field is complicated by winter temperatures that freeze the Caspian and an oil reservoir that contains lethal gas.

In September, ONGC agreed to spend $1 billion to buy Hess Corp. (HES)’s 2.7 percent stake in Azerbaijan’s largest oil field and an associated pipeline. BP Plc, the operator of the Azeri-Chirag-Guneshli fields, has been criticized by the Azeri government for a faster-than-expected decline in production.

‘Wrong Experience’

ONGC scrapped a plan to revive production for Imperial’s fields just months after completing the purchase of the company because the fields didn’t perform as expected. The Indian company this year backed away from buying a 25 percent stake in a second Russian producer, OAO Bashneft, because they couldn’t agree on a price.

China has been more aggressive than India in pursuing overseas oil and gas acquisitions as the world’s most populous nations look for oil fields to meet soaring energy demand.

China Versus India

China’s Cnooc Ltd. (883) offered $17 billion for Canada’s Nexen Inc. this year. China Petrochemical Corp. bought Addax Petroleum, based in Canada and focused on Africa and the Middle East, in 2009 for $8.9 billion. By contrast, India’s biggest prize before 25 November deal was Imperial Energy.

ONGC produced 8.75 million tons (about 175,000 barrels a day) overseas in the year ended in March. The company wants to produce 60 million tons by 2030 by investing in fields outside India.

India consumed 3.5 million barrels of oil a day in 2011, up 3.9 percent from the previous year, according to BP Plc (BP/)’s Statistical Review of World Energy. Only the U.S., Japan and China consumed more.

ConocoPhillips and ONGC Videsh expect to close the deal for a stake in the North Caspian Sea Production Sharing Agreement in the first half of next year, according to a statement yesterday. The Kazakh government and project partners including Exxon Mobil have the right of first refusal on the sale, according to the statement.

North Caspian Sea Operating Co. operates Kashagan. The partners include Eni SpA (ENI), Exxon Mobil, KazMunaiGaz, Shell andTotal SA (FP), each with 16.8 percent, according to ConocoPhillips’website. Japan’s Inpex Corp. (1605) has 7.6 percent.