Bloomberg News

ONGC in Talks to Spend at Least $1 Billion on U.S. Shale

March 02, 2012

ONGC Videsh produced a record 9.4 million metric tons of oil and equivalent gas in the year ended March 31. Source: ONGC Videsh Ltd. via Bloomberg

ONGC Videsh produced a record 9.4 million metric tons of oil and equivalent gas in the year ended March 31. Source: ONGC Videsh Ltd. via Bloomberg

Oil & Natural Gas Corp. (ONGC), India’s biggest energy explorer, is close to an agreement to buy its first shale gas asset in the U.S. and plans to spend at least $1 billion on purchases.

“A deal could be done very soon,” D.K. Sarraf, managing director of its ONGC Videsh Ltd. overseas unit, said in an interview at his office in New Delhi yesterday. “We’re in various stages of discussions for a number of properties. Shale gas production in the U.S. has been a revolution.”

Sarraf, 54, took office in September and is leading ONGC’s quest to acquire assets from Mozambique to Russia to secure energy supplies for the world’s second-fastest growing major economy. The state-run explorer’s entry into U.S. shale would follow investments by Exxon Mobil Corp. (XOM), BP Plc and Reliance Industries Ltd., which have driven up valuations.

“A new ONGC management is in place and we’re hoping things move forward quickly now,” said Rina Sanghavi, a Kolkata-based research analyst at SPA Securities Ltd. “They need to be more proactive than they have been and shale gas is a great place to start. There’s rising demand for gas around the world and especially in India.”

ONGC is working with various banks, Sarraf said, without identifying them. The company may buy stakes in more than one shale gas asset, he said. Shale is a sedimentary rock that can hold gas and oil.

The shares fell 2.4 percent to 281.40 rupees, the biggest decline since Dec. 8. The stock has climbed 10 percent this year, compared with a 14 percent increase in the benchmark Sensitive Index. (SENSEX)

Auction Sale

The government raised at least 122 billion rupees ($2.5 billion) in an ONGC share auction yesterday, with 95 percent of the bids placed in the final 10 minutes, according to stock exchange data. The target was to raise 124 billion rupees and a delay in disclosing the final results spurred speculation the sale had failed after the issue was priced at a premium.

Companies that have invested in U.S. shale include Marubeni Corp. (8002), which said Jan. 6 it agreed to buy a 35 percent stake in an acreage from Hunt Oil Co. in a $1.3 billion deal that includes future drilling costs. The deal values the fields at about $25,000 an acre.

Total SA’s $2.32 billion acquisition on Jan. 3 of a stake in the Utica region in New York from Chesapeake Energy Corp. was for about $15,000 an acre, according to Bloomberg calculations. Reliance’s purchase of Eagle Ford acreages from Pioneer Natural Resources Co. in June 2010 valued the deal at $11,100 an acre, according to Sanford C. Bernstein Ltd.

High Imports

India imports more than 80 percent of its oil and 25 percent of its natural gas requirements. ONGC would look to bring gas to India from the U.S. after the shale acquisition, Sarraf said.

“It would still work out cheaper to transport the gas from the U.S. because prices are cheaper there and LNG in Asia is much more expensive,” he said.

The U.S. produced 96 billion cubic meters of gas in 2009, overtaking Russia as the world’s biggest producer. Output surged to 142 billion cubic meters in 2010, causing prices to slump. Cheniere Energy Inc. (LNG) and Freeport LNG Development LP are among companies that plan to liquefy and export U.S. gas.

Natural gas prices in New York trading have fallen 15 percent this year following a 32 percent slump last year and a 21 percent drop in 2010.

“If gas prices are cheap now, it means the assets will also be cheap,” Sarraf said. “We can buy now and wait for prices to go up in the future. We are looking at pure gas, and gas and liquids assets.”

Production Cut

The decline has forced explorers including Chesapeake, the second-largest U.S. gas producer, to cut production. Chesapeake and BHP Billiton Ltd. are turning their focus to oil.

“I don’t think ONGC will find a cheap shale gas asset in the U.S. very easily,” said Walter Rossini, a Milan-based fund manager who oversees about 300 million euros ($397 million) in Indian and Russian equities at Aletti Gestielle SGR SpA. “ONGC is one of the few companies which isn’t there already. All the interest from around the world has driven up price of assets.”

ONGC and GAIL India Ltd. (GAIL), India’s biggest distributor of natural gas, are participating in the sale process of Cove Energy Plc and haven’t decided whether to make an offer, the two companies said in a Feb. 28 regulatory filing.

Cove Asset

The companies are unlikely to counter a 1.1 billion pound ($1.7 billion) bid by PTT Exploration & Production Pcl (PTTEP) for Cove, three people familiar with the matter said that day.

Sarraf declined to comment on Cove, which has a stake in a deposit in Mozambique that may hold enough gas to justify exports to China and India.

ONGC Videsh produced a record 9.4 million metric tons of oil and equivalent gas in the year ended March 31 and plans to raise it to 20 million tons in the year ending March 2018 and 35 million tons by 2030, Sarraf said in a message to employees, posted on the company’s website.

Gas trapped in shale rock wasn’t considered worth tapping before Houston billionaire George P. Mitchell pioneered new extraction techniques in the 1990s. The rock is broken up by injecting a mix of high-pressure water and chemicals in a process called hydraulic fracturing, or fracking, to release the gas.

To contact the reporter on this story: Rakteem Katakey in New Delhi at

To contact the editor responsible for this story: Amit Prakash at

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