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Assignment Number 1, ConocoPhillips stake in Kashagan acquired by ONGC Abishek Thampan, Roll No: 11BM60126 An overview of the Acquisition

Indian Acquiring Company: Oil and Natural Gas Corporation Target Company: Kashagan oilfield (stake held by ConocoPhillips) Target company location: Kazakhstan Announcement date: November 2012 Deal Size: 5 billion $

Major Details
ONGC , in its biggest acquisition ever, agreed to buy an 8.4 % stake in the Kashagan Oilfield in Kazakhstan currently owned by ConocoPhillips. This will help ONGC gain Participating Interest (PI) in the North Caspian Sea Production Sharing Agreement (NCS PSA) that includes the Kashagan Field, in Kazakhstan. Italy's Eni, Dutch Shell, France's Total, ExxonMobil and KazMunay Gas have 16.81% stake each, while Inpex of Japan has the remaining 7.56 per cent in the Kashagan Fields. ONGC Videsh Ltd (OVL), the overseas arm of ONGC, will pay a base price of $4.25 billion plus a share of working capital and other cash calls together with interest for the 8.4% stake in the field that produces 370,000 barrels per day (18.5 million tons a year) of crude oil. OVL is a wholly owned subsidiary of Oil and Natural Gas Corporation Limited, whichis the largest Indian international oil and gas Exploration and Production (E&P) company. Goldman Sachs is acting as exclusive financial advisor, Allen & Overy as legal advisor, E&Y as tax and accounting advisor and Bayphase as technical advisor to OVL.

Motivations behind the acquisition a. By ONGC

The Kashagan Field, located in the shallow waters (about five to eight meters) of the Kazakh North Caspian Sea, is one of the world's largest development projects. The acquisition would mark ONGC's entry into the oil-proven North Caspian Sea of Kazakhstan. The acquisition will add an average annual production of about 7.3 million barrels for more than 25 years, with a peak of about 11.7 million barrels. The acquisition will reduce the dependence on foreign sources for crude oil as around 80% (USD 140 billion) of Indias crude oil comes from imports and only the rest 20% is produced from India. Thus the acquisition bears significant strategic importance to India in terms of contributing to the country's energy security. The deal is perfectly suited to match ONGCs corporate strategy. ONGC has recently formulated its 'Perspective Plan - 2030,' projecting OVL's oil and gas production at 440 million barrels by 2030, up from 146 million barrels in 2018 and 64 million barrels in fiscal 2012. The company plans to invest nearly USD 200 billion over the next 17 years to reach its goal and this is the first major step towards attaining the goal.

b. By ConocoPhillips

ConocoPhillips targeted asset sales till 2013 year end is 8-10 billiion $ of assets and the sale of 5 billion $ worth of kashagan field will take the company much closer towards its target The deal will help ConocoPhillips to fill the cash flow gap and help them funding a proposed large capital programme The deal will help ConocoPhillips in enhancing the liquidity and help maintain a solid leverage profile. The oil fields at Kashagan form only a very small portion of companys current production and reserves and they plan to reinvest the capital in other higher return investments.

Potential risks that ONGC might face in the investment

The acquisition would be funded with debt and would increase ONGC's consolidated net debt by at least USD 5 billion, a credit negative. Oil and Natural Gas Corp (ONGC) has been struggling to generate positive free cash flows given its already high capital expenditure programme (about USD 7.5 billion in current year) Multiple delays and the cost overruns that has occurred over the past decade for ONGC increases the project execution risk, but ONGC expects to mitigate this risk from the first production from this field. In addition to the acquisition cost, ONGC will also need to make investments in the subsequent phases of the project, with those costs based on future discoveries and sums that could be higher than the present USD 5 billion investment.