Saturday, June 14, 2008

IOC, OVL To Invest $3 B In Iran Block - June 14, 2008

An Indian consortium led by ONGC Videsh would invest $3 billion in developing gas reserves at the Farsi block in Iran, a senior official from Indian Oil Corporation, which is also a part of the group, said on Friday.

ONGC Videsh, a wholly-owned subsidiary of Oil and Natural Gas Corporation (ONGC), and Indian Oil, India's largest oil refiner and marketer, hold 40% each in the Farsi block, with Oil India holding the rest. Requesting anonymity, the official said that the block may hold reserves of up to 12.8 trillion cubic feet of recoverable gas.

"We submitted the commerciality report for gas development in the block in December 2007. Indian Oil's share in the investment would be $1.2 billion," the official said.

The Farsi block is estimated to have over one billion barrels of in-place oil. Though the official did not give a timeframe for the proposed investment, he said that Iranian authorities have indicated that the commerciality of the gas discoveries could be approved "anytime soon".

Calling the oil discovered at the Farsi block "very heavy", the official said gas development could be completed within three-four years after the approval comes through. However, the consortium would not be allowed to import the oil and gas to India as it is a service contract. "We will get 35% return on the exploration investment made in the block and hope to get 15% return on development. The returns could be less as the risk is low," the official said.

According to an analyst, the primary concern for the consortium would be starting development and production at the earliest. "They may find it very difficult to secure funding if uncertainty over the timeframe for starting production continues," the analyst said, on condition of anonymity.

The high interest-rates, considering the uncertainty and the current credit situation, may directly affect the consortium's profitability, the analyst added. He said the group might want to convert the gas obtained into liquefied natural gas (LNG) and bring it into India, as the economics for LNG are positive now.

"There is a huge infrastructure available and under development for transporting and also regasifying LNG but there is not enough gas. LNG sells at almost double the price in the spot market than the piped gas sold at Nymex," he said.

However, the group will have to maintain prices to be able to find enough buyers. Indian Oil officials did not comment on the possibility of such a move.

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