Losing PetroKazakhstan was no bad thing after all

Vol 9, PW 11 (08 Sep 05) People & Policy

India should consider itself lucky that it lost the battle for PetroKazakhstan.

A senior industry source with inside knowledge tells us this opportunity was no opportunity at all - more a loss-making proposition from the start. OVL was not the only Indian company to look at PetroKazakhstan.

A formidable private sector player in India also examined the Canadian company, but walked away. PetroKazakhstan is a good opportunity for China, but not for India, we are told.

If India had bid $4.18bn the return on investment would have been only 7%. Against this, the cost of capital for Kazakhstan given its risk profile is 12.2%.

The return on investment does not meet the cost of capital. It is a loss-making deal.

Geography is another key issue: India has no border with Kazakhstan; China does, and is already laying an oil pipeline from Kazakh oilfields. The way the Chinese operate ensures them a good return on capital, we learn.

They ensure they get most of the contracts for the support services as well. This saves them money and increases their return on investment.

Politically too, Kazakh authorities would not dare offend the Chinese by placing hurdles in their path. Beijing has influence in Astana; Delhi has little or none.

Another compelling reason against the deal is PetroKazakhstans declining oil production: from 151,000 b/d three months ago to 110,000 b/d today. Production will fall further, we learn.

About 70% of the production comes from three or four oilfields. These are now very mature.

Total recoverable reserves in these fields are 550m barrels and PetroKazakhstans reserves to production ratio for these mature fields is close to six. The fields are in sharp decline and on the verge of exhaustion, we learn.

The reserves to production ratio should be between 10 and 15. PetroKazakhstan claims reserves upside but did not allow any due diligence.

You had to accept what they said without being allowed to verify it, we learn.

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