ONGC Videsh-Led Consortium to Invest $4 Billion to Develop Farzan Oil Field in Iran

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Researched by Industrial Info Resources (Sugar Land, Texas)--ONGC Videsh Limited, a fully owned subsidiary of Oil and Natural Gas Corporation Limited (BSE:500312) (Dehradun, India), in association with Indian Oil Corporation (BSE:530965) (New Delhi, India) and Oil India Limited (Noida), is expected to start production of an Iranian oil field by 2012-13. The discovery of the Farzan oil field, made by an ONGC Videsh-led consortium, was approved by the Iranian government in September last year. The oil field is part of the Farsi block in the Persian Gulf. The partners propose to spend about $4 billion toward the development of the oil field and production. Work on a detailed project and development plan is in progress. The field is estimated to have resources of 21.68 trillion cubic feet, of which 12.8 trillion cubic feet is recoverable. ONGC Videsh, the operator of oil field and Indian Oil Corporation each hold a 40% stake in the project, and Oil India holds the remainder.

The gas from field will be liquefied and then transported to India and Kuwait as liquefied natural gas (LNG). The consortium will have to apply to the Iranian government for permission to convert the gas into LNG. National Iranian Oil Company (Tehran) will have marketing and distribution rights over the oil and gas produced in the Farzan oil field. Though Iran does not have any LNG exports presently, the country aims to produce 77 million tons per year by 2014.

Work has also commenced on the proposed Ennore LNG terminal near Chennai in Tamil Nadu, which will function as a storage and distribution hub for imports from Iran. The LNG storage terminal, developed by Indian Oil Corporation and Chennai Petroleum Limited (BSE:500110) (Chennai, India), will have an initial capacity of 2.5 million tons. National Iranian Oil Company holds 15.4% stake in Chennai Petroleum Limited. GAIL (India) Limited (BSE:532155) (New Delhi, India) has also expressed interest in participating in the domestic LNG distribution process. India is also in talks with Iran over the 2,775-kilometer Iran-Pakistan-India natural gas pipeline project. The pipeline project entails importing 2.2 billion cubic feet per day of natural gas by Pakistan from Iran's South Pars field, which will be shared equally with India. India has agreed to pay $200 million annually as transit fees to Pakistan. Construction is expected to begin this year and will be complete by 2012. But the project is facing hurdles because of the strain in political ties between India and Pakistan.

Iran, which has the world's second largest gas reserves, is also exploring the possibility of developing the 10 trillion-cubic-foot Lavan oil field with cooperation from European companies. The country has not been able to exploit its full potential because of decades of warfare. Development of the energy sector has also been hindered by the United Nations' and United States' imposed embargoes, trade sanctions and obsolete technology. Iran has faced stiff opposition for its nuclear weapons program. This has led to many international energy firms, including Royal Dutch Shell (NYSE:RDS.A) (The Hague, Netherlands) and Total S.A. (NYSE:TOT) (Paris), which have delayed or abandoned exploration plans in Iran. But Iran's vast energy resources are now attracting the attention of countries including India, looking at assets overseas to gain energy independence. Recently, ONGC Videsh also submitted a detailed feasibility study to National Iranian Oil on the discovery of the 1.1 billion-barrel Binaloud oil field.

In a related development, ONGC Videsh, which functions as the overseas energy assets acquisition arm of ONGC, is close to inking a renegotiated deal with Iraq. The exploration agreement was originally signed in 2000 during the Saddam Hussein regime. OVL had completed the preliminary activities on the project, but had to cease work because of political unrest in the country at that time. The new renegotiated contract will be signed shortly. This is the second deal renegotiated by Iraq. China signed a renegotiated $3 billion deal with Iraq in August last year.

The deal will allow ONGC Videsh to begin exploring and developing Block No.8, located in the desert of southern Iraq, bordering Saudi Arabia. The block, is estimated to have reserves of 645 million barrels, of which 54 million barrels is presently recoverable. The company is expected to invest $186 million in two phases for exploration, followed by $1.45 billion for its development. OVL, which is scouting for a partner for this project, proposed to keep 51% of the oil, while sharing 25% with Iraq National Oil Company (Basra) and the rest with the selected partner. OVL is also considering bidding for six other oil-producing fields in Iraq. The oil fields include Bai Hassan, Rumaila North and South, Zubair, Kirkuk, West Qurna I and three fields in Meissan. Two gas fields at Mansooriya and Akas are also up for auction.

ONGC tops the list of India's largest overseas investors, with 31% foreign investments and assets. ONGC has discovered more than 300 oil and gas fields and developed in-place reserves of 6.42 billion tons. ONGC Videsh has a presence in 15 countries, participating in 29 exploration and production projects.

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