ONGC exits Trinidad and Tobago gas block
Moneylife Digital Team 08 July 2010

The state-owned exploration and production major decided to exit the bloc after its partner, Lakshmi N Mittal, walked out of the project.

Oil and Natural Gas Corporation (ONGC) has been forced to exit a gas block in Trinidad and Tobago after its partner, Lakshmi N Mittal, walked out of the project, reports PTI.

"The Cabinet Committee on Economic Affairs (CCEA) today granted ex-post-facto approval for withdrawal of ONGC Videsh Ltd (OVL) — the overseas arm of the state-owned firm — from North Coast Marine Area-2 (NCMA-2) project in Trinidad and Tobago," home minister P Chidambaram told reporters in New Delhi.

ONGC-Mittal Energy Ltd (OMEL) — the joint venture of OVL and Mittal Investment Sarl (MIS) — had in 2007 won offshore block NCMA-2, which is estimated to hold in-place reserves of two trillion cubic feet of gas, beating Britain's Centrica Plc.

But last year, MIS, the holding company of the Mittal family's interest, decided to exit the project because of the global economic meltdown.

"Considering all aspects of the situation and the then depressed markets, OVL came to the conclusion that in the absence of MIS, it would not like to continue on a 100% standalone basis with an estimated expenditure of $304 million," he said.

OMEL had 65% interest in the block, while Trinidad and Tobago's state-owned oil firm, Petrotrin, had the remaining stake.

Under the initial agreement, OMEL was required to "carry" Petrotrin during the exploration phase, which means it had to contribute towards Petrotrin's share of investment.

After the exit of MIS, OVL — the overseas investment arm of ONGC — would have to foot the entire $304 million exploration expenditure, with Petrotrin not willing to share any risk.

Chidambaram said OVL tried to get an international energy firm as partner but did not succeed, so it had no option but to exit the block after incurring an expenditure of about $1.05 million.

After the exit of MIS, companies like Centrica, RWE Dea Ag of Germany, BG Group of UK and Spain's Repsol had expressed interest in partnering OVL, but subsequently withdrew, he said.

Also, there were differences between OVL and Petrotrin over treatment of disallowed costs in the exploration block.

OVL wanted the disallowed cost to be shared by Petrotrin, but the issue could not be resolved, he said.

OMEL had also committed to pay a signature bonus of $30.1 million for the acreage, but this was never paid as the Production Sharing Contract (PSC) was not concluded.

NCMA-2 was considered OMEL's second biggest success after Nigeria, where the joint venture had acquired two exploration areas.

Mittal had identified Trinidad and Tobago as one of the eight priority nations for pursuing oil and gas opportunities exclusively with ONGC. But of late, it has started exiting most of the investments, including the prospective Satpayev oilfield bagged by OMEL in Kazakhstan.

ONGC and Mittal had in July, 2005, inked a joint venture agreement for acquisition of oil and gas fields, besides refinery and liquefied natural gas (LNG) projects, in 27 countries. The agreement had classified target countries into Schedule-I and II.

Mittal and ONGC had agreed to participate on an exclusive basis through OMEL in Schedule-I countries such as Angola, Azerbaijan, Indonesia, Kazakhstan, Romania, Trinidad and Tobago, Turkmenistan and Uzbekistan.

In Schedule-II countries like Bosnia, Canada, China, the Czech Republic, France, Germany, Kyrgyzstan, Liberia, Sudan, Macedonia, Mexico, Nigeria, Poland, South Africa, UK and the US, the two partners agreed to bid jointly on a case-to-case basis.

Sources said while OMEL was required to carry the 35% participating interest of Petrotrin in NCMA-2, the Trinidad and Tobago government had demanded that OMEL sign an indemnity arrangement to protect its state-run firm from any losses in case the exploratory programme in the block was unsuccessful.

This was not agreeable to OVL, which wanted Petrotrin to share its costs.

The total estimated cost for the first phase of exploration was $304 million, with OVL's share pegged at $155 million. If OVL was to explore the block on a standalone basis, its share of investment would have increased by $149 million.

OVL's $155 million investment was based on a minimum expectation of a 14% return on capital.

Initially, Centrica, RWE Dea AG of Germany, the BG Group of UK and Repsol of Spain had expressed interest in the project once MIS walked out, but none made any formal offer for participation.

Unable to secure a partner, OVL finally decided to withdraw from the project, they said. The company has written-off around a million dollars of administrative expenses incurred on the block.

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