Last updated: November 26, 2012 5:59 pm

Conoco sells stake in Kashagan field

ConocoPhillips, the US oil and gas group, has agreed to sell its 8.4 per cent stake in the giant Kashagan field in Kazakhstan to ONGC of India for about $5bn, in the latest shake-up at one of the world’s largest oil projects.

Kashagan, in the northern Caspian Sea, is one of the largest oil discoveries of the past four decades, but its development has been plagued with delays and cost overruns.

Conoco is selling out for a loss of about $500m on the book value of its stake and will take a post-tax charge of about $400m in the fourth quarter.

Royal Dutch Shell, Eni of Italy, Total of France and ExxonMobil of the US each have 16.8 per cent of Kashagan, as does KazMunaiGaz, Kazakhstan’s national oil company.

The field, discovered in 2000, had been expected to start production in 2005, but is now scheduled to come on stream in the first half of next year, at a cost of $46bn. Harsh winter conditions and high levels of toxic hydrogen sulphide in the oil have made it a challenging development, and there have been management missteps and disputes between the project partners.

Initial production is expected to be 370,000 barrels per day, with potential to increase that if there is further investment.

Eni was the operator leading the Kashagan project until 2008, when after increasingly acrimonious negotiations with the Kazakh government the newly created North Caspian Operating Company, jointly owned by all the consortium members, was formed to take over responsibility. At the same time, KazMunaiGaz doubled its stake in the project, with its partners reducing their stakes on a pro-rata basis.

Shell will have an enhanced role as operator of production when the project starts up next year, and has been discussing possible further expansion.

Simon Henry, its chief financial officer, said earlier this month that production could rise to more than 1m b/d, but pointed out that a previous expansion plan had been halted 18 months ago.

He said that development had been stopped “because the fiscal environment for the project and the government as we saw it did not support continuing with what would basically be a massive industry investment”.

He added: “Until we see those issues resolved, the project will basically only develop a very small proportion of its potential.”

Conoco, the third-largest US oil and gas group by production, is undergoing radical restructuring to focus its operations and improve shareholder returns. It has been divesting assets such as its 20 per cent stake in Lukoil of Russia, sold in 2010-2011. In May, it split off its refining, chemicals and pipeline operations into a new company, Phillips 66.

Its expansion plans are now focused on a small number of regions around the world, principally in developed economies including the US, Australia and Norway.

The Kashagan stake sale would bring Conoco’s total proceeds from disposals announced this year to about $7bn, taking it most of the way towards its target of raising $8bn-$10bn from asset sales in 2012-2013.

For ONGC, which is 79 per cent owned by the Indian government, the entry into Kazakhstan fulfils a long-held ambition. It was in talks with Exxon last year about buying the US company’s stake, along with Indian Oil Corporation, another state-controlled group, but the negotiations did not result in a deal.

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