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ConocoPhillips to Sell Kazakh Waters Interests; Expects Proceeds of $5B

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ConocoPhillips to Sell Kazakh Waters Interests; Expects Proceeds of $5B

ConocoPhillips unveiled plans to sell its 8.4% interest in the Kashagan oil project in the Caspian Sea off Kazakhstan for proceeds of about $5 billion, as the exploration and production company continues its effort to divest itself of billions of dollars in assets this year.

ConocoPhillips said it has notified government authorities in Kazakhstan and its co-venturers of its intent to sell. ONGC Videsh Ltd., the international arm of India's Oil and Natural Gas Corporation Limited, will buy ConocoPhillips's interest in Kashagan.

Houston-based ConocoPhillips is in the midst of a three-year repositioning aimed at improving its balance sheet and focusing on more profitable and less risky unconventional fields in North America. Its plan includes $15 billion to $20 billion in asset sales, large-scale share buybacks and the spinoff earlier this year of its refining arm to Phillips 66.

The company has shed several other international assets, including shares in a Russian joint venture to Russian oil giant LUKOIL, while ramping up production in hot U.S. shale oil fields such as the Eagle Ford in south Texas.

ConocoPhillips said asset sales had brought in $2.1 billion through Sept. 30. Once closed, the latest deal would increase that total to about $7 billion, positioning the company to accomplish its target of $8 billion to $10 billion by the end of 2013.

The move also comes as large oil companies in rapidly developing Asian countries such as India and China scour the globe for oil and gas resources.

ONGC, India's largest oil and gas explorer, has said it is looking for overseas assets, which it needs to help compensate for declining oil output at its domestic fields. ONGC accounted for 62% of crude-oil and 49% of natural-gas output of India's production in the year ended March 31.

Still, India relies on imports for 80% of its oil needs. Its imports climbed to 3.43 million barrels a day in the year ended in March, up from two million barrels daily six years earlier. ONGC and other companies in India produced a combined 761,800 barrels a day in the last financial year.

ONGC Videsh Ltd. said in a statement that the acquisition "bears a significant strategic importance to India in terms of contributing towards India's energy security."

"From Phase 1, the acquisition is likely to add an average annual production of about 1.0 million metric tons for a period of over 25 years with a peak of about 1.6 million metric tons," ONGC Videsh said.

The agreement is subject to government and regulatory approvals, priority rights and consortium pre-emption rights, ONGC Videsh said, adding it expected to close the deal in the first half of 2013.

RBC Capital Markets analyst Scott Hanold wrote in a research note Monday morning that the sale made strategic sense for ConocoPhillips, as it would help the company to close its cash flow gap, the result of increased oilfield spending and large dividends.

"We think this is an important step in the company's strategic re-positioning because it should fully fund its free cash flow deficit [including dividends] over the next few years," Mr. Hanold wrote.

ConocoPhillips acquired an interest in blocks in the Kashagan field, located in Kazakhstan's sector of the Caspian Sea, in 1998 through the North Caspian Sea Production Sharing Agreement. The plan to develop the Kashagan field was approved by the government of Kazakhstan in 2004. The operator, North Caspian Operating Company B.V., was aiming for 2013 start to production, according to ConocoPhillips' website.

ENI S.p.A., Exxon Mobil Corp., KazMunaiGas, Royal Dutch Shell PLC and Total S.A. each have a stake in the consortium that is developing the Kashagan field.

Lysle Brinker, director of energy equity research for IHS Herold, said the Kashagan is a "monstrous"-sized oil field, estimated to contain eight billion to 10 billion barrels of potentially recoverable oil.

But developing the large and complex field has been made more difficult by the region's harsh climate and high levels of dangerous and corrosive hydrogen sulfide, which necessitates more costly, specialized equipment.

"The complexity of the field did bring up cost and delays," Mr. Brinker said. "From ConocoPhillips's viewpoint, $5 billion--they can deploy that in a lot of projects where they see higher returns going forward than what Kashagan offers at this point in time."

Still, he expects the other venture partners, which have larger stakes in the project, to stay put for now, given that the initial phase of production is expected to begin soon.

In its last annual report, ONGC outlined an ambitious plan to invest as much 11 trillion rupees ($200 billion) by 2030 to double production. ONGC's output, near stagnant since 2002, has been falling over the past five years, increasing Indian refiners' import dependency.

The company said earlier this month that it will miss its production forecast for the current and next financial years due to project delays, further shaking investor confidence in the company.

Meanwhile, ConocoPhillips still has a 24.5% stake in a joint venture to develop the N Block, also in Kazakhstan waters, which it entered in 2009.

The company noted that as of Sept. 30, the carrying value of the net assets related to ConocoPhillips' interest in Kashagan was about $5.5 billion. As such, it expects to record a write-down of about $400 million in the fourth quarter.

Copyright (c) 2012 Dow Jones & Company, Inc.

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