1. OVL crawls as Chinese firms race to pick up oil fields

OVL crawls as Chinese firms race to pick up oil fields

China has invested $73 billion in global upstream M&A between 2011 and 2013, more than three times of what OVL has invested since inception

By: | Published: May 25, 2015 12:05 AM

IT’S been close to five decades since Hydrocarbons India Pvt. Ltd was set up to explore and develop the Rostam and Raksh oil fields in Iran and undertake a service contract in Iraq. Re-christened as ONGC Videsh Ltd (OVL) in 1989, the overseas arm of India’s flagship oil and petroleum explorer ONGC, it today has participating interests in 33 oil and gas assets in 16 countries. ONGC Videsh’s cumulative investments overseas crossed $ 22 billion in March, 2014.

However, that number has been dwarfed by India’s neighbour China. Although China started shopping for equity in hydrocarbon projects overseas nearly three decades later after India, it has invested around $73 billion in global upstream merger and acquisition deals between 2011 and 2013. That’s more than three times OVL’s investments.

Moreover,  OVL’s acquisition of Imperial Energy in 2009 worth $2.1 billion turned out to be the worst buy in recent times after the output drastically fell to less than 7,000 barrels per day now against a forecast of 80,000 barrels per day.


China first ventured overseas in 1993, investing in oil and gas production in Thailand, Canada and Peru and later Sudan in 1995. Since then, it has emerged as a large international operator, with activities spread across more than 40 countries and producing 2.5 million barrels of oil equivalent per day (mboe/d) of oil and gas overseas in 2013, according to a report by Julie Jiang and and Chen Ding of International Energy Agency (IEA).

In contrast, OVL’s production is hovering around 8.78 million tonnes of oil equivalent (mtoe) annually, or less than one mboe/d, way below levels that China is drilling overseas. Meanwhile, India’s crude oil imports have risen by more than 10% from 171.73 million tonnes in 2011-12 to 189.43 million tonnes in 2014-15.


Even though the efforts were put in half a century back, OVL’s performance has not been able to keep pace with the rising demand at home nor with that of companies such as Chinese state-owned China National Petroleum Corporation (CNPC). IEA research indicates that by the end of 2013, Chinese overseas oil and gas production saw a significant increase from 1.36 mb/d in 2010 and equivalent to Brazil’s total oil production in 2013 and to half of Chinese domestic production in the same year. Moreover, it also invested $29 billion in long-term loan-for-oil and gas deals with Russia and Turkmenistan to get additional oil and gas supplies.

On the other hand, OVL has made new acquisitions to the tune of $5 billion in recent times including a 2.72% stake in the Azeri, Chirag and the deep water portion of Guneshli Fields in the Azerbaijan; 2.36% interest in the Baku-Tbilisi-Ceyhan pipeline; an additional 12% stake in Block BC-10 at Campos Basin in Brazil; a 6% stake in the Rovuma Area 1 offshore block in Mozambique from Videocon and a direct 10% stake in the same Rovuma Area 1 from Anadarko.

D K Sarraf, chairman of ONGC group, believes that although the production is in single digits (less than 10 mtoe/annum) now, the assets acquired by OVL have tremendous potential. “For instance, Mozambique is poised to become the second largest LNG hub in the world after Qatar,” Sarraf says. Sarraf, who served as the MD of OVL prior to becoming chairman of the group, feels that the output figure could be increased by acquiring producing assets, but points out that these come at a ‘premium’. On the other hand, acquiring assets at the exploration stage helps build a longer-term portfolio.


Ehsan Ul-Haq, a senior market consultant at KBC Energy Economics in London, points out that China has become the largest oil importer in the world with more than 7 million bpd of crude oil imports. India, on the other hand, imports less than 4 million bpd. “India is catching up as the Chinese economy slows down, while low oil prices have provided Indian companies an opportunity to look for some assets abroad,” Ul-Haq said.

In hindsight, OVL cannot be completely blamed. The business of acquiring equity in hydrocarbon resources is, after all, backed by diplomatic relationships. The government’s engagement in one-on-one dialogues as well as promoting Indian firms to go as a consortium, an approach earlier taken successfully by China, South Korea and Japan, is important for energy security.

For instance, a breakthrough year for Sino-Russian energy co-operation was in 2013 when Chinese companies reached multiple deals, including a 25-year long-term loan-for-oil deal with Russia’s Rosneft to double Russia’s crude oil supply to China to 600,000 bpd through pipelines. Last May, CNPC and Gazprom finally inked a historical gas supply contract of 38 billion cubic metres (bcm) from Russia to China for 30 years.

When Russian President Vladimir Putin visited New Delhi in December 2014, Ruias-owned Essar Oil inked a multi-billion dollar deal to import crude oil, but no major upstream deal between the national oil companies of the two countries was witnessed. It is yet to be seen whether Prime Minister Narendra Modi can help the country secure stronger energy ties overseas.

The latest issue is whether OVL would be allowed to monetise the Farzad B gas field in Iran. Iran, which wants sanctions levied by Western powers to be suspended and eventually terminated, would like to auction the field rather than give it to OVL which discovered it in 2012. Iran is clear that “earlier discussions were a closed file”. This is despite the fact that the Farzad B field is estimated to have 21.68 trillion cubic feet  of gas reserves, discovered by OVL in 2012.

“At a time, when oil prices are low and many oil producers are struggling, oil assets can be acquired at reasonable prices and companies such as OVL with low debt are better placed to hunt for oil assets all over the world,” Ul-Haq said.

S P Garg, director (finance) of OVL, says the explorer wants to take advantage of lower crude prices and make acquisitions. However, not many companies are willing to divest equity in a scenario when commodity prices have been hammered by more than 60% last year and are yet to recover. OVL’s output is also lower because its assets are trapped in war-torn countries. OVL had registered the highest ever production of 9.45 mtoe in 2010-11. However, the explorer’s assets in South Sudan, that are used to produce about 45,000 barrels per day, are not running at full throttle while its fields in Syria where output could have hit nearly 70,000-80,000 barrels per day are completely shut because of the geopolitical turmoil.

Garg says OVL is trying to revive production from Imperial Energy. Currently, it is undertaking fracking to determine the hydrocarbon presence in tight rock formations and the results will be known in the next two-three months. Of OVL assets, 13 are producing; four are under development, 14 are in the exploration phase and two are pipeline projects. The explorer has an ambitious target to double its output to 20 mtoe by 2017-18. Chairman Sarraf feels an exploration company like OVL should have a ‘balanced porfolio’, which it does and therefore its outlook is bright. OVL has talked about re-structuring its assets by selling stakes in some and acquiring more producing ones. But there has been little action on the ground.

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