ConocoPhilips Sale Raises Kazakh-Indian Pipeline Question

ConocoPhilips Sale Raises Kazakh-Indian Pipeline Question

ConocoPhilips (NYSE:COP) has sold its stake in one of the world’s largest oil fields. The company announced today that it was parting with its 8.4 percent stake in the Kashagan oil field, the largest oil field discovery since 1968. The firm will sell the share to Indian firm, Oil & Natural Gas Corporation Limited (NSE:ONGC) for around $5 billion.

ConocoPhilips Sale Raises Kazakh-Indian Pipeline Question

Oil & Natural Gas Corporation Limited (NSE:ONGC) is under pressure from the Indian government to increase supply in order to meet domestic demand. This deal forms the largest ever acquisition by the company. The firm has set aside more than $6 billion this year for capital investments.

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For ConocoPhilips (NYSE:COP) this deal is just one part of a wide strategy that has seen them divest themselves of large amounts of assets. The company has exceeded a 2012 target to divest itself of $20 billion in non-core assets. The firm seeks to use its liquid assets to increase dividends and exploration.

The market does not seem to be convinced of the advantages of this deal. shares in ConocoPhilips (NYSE:COP) were trading down this morning. At time of writing the firm’s stock stood at 56.15, down almost 1% from today’s open. The company’s shares have yet to recover from a crash of more than a third after a poor earnings report in April.

Kashagan Field is an oil source located off of the coast of Kazakhstan. The field holds over 30 billion barrels of oil, though due to the harsh environment, and the field’s complexity, only about 12 billion barrels are recoverable. The field is expected to start commercial production in the early part of 2013.

The oil field lies along the Kazakhstan-China Pipeline, an oil supply line that extends from Kazakhstan’s rich reserves to Xinjiang in China. India’s Oil & Natural Gas Corporation Limited (NSE:ONGC) is moving to secure some of Kazakhstan’s reserves to fuel that country’s economic growth.

Both China and India are expected to see demand for oil multiply in the coming decade. With only so much of the resource in the region, there will be ferocious competition. Much of that competition may take place in Kazakhstan, and that country stands to profit as a result.

ConocoPhilips Sale Raises Kazakh-Indian Pipeline QuestionChina’s pipeline, the planned route for which can be seen above, takes advantage of the border shared by the two countries. India does not have the same advantage. A Pipeline between Kazakhstan and India would need to travel through Afghanistan in order to be viable.

The prospect of a pipeline to the Indian Ocean is deeply popular in Kazakhstan. Plans for such a project have been broached several times in the past decade, but have never come to fruition. Most of the country’s existing pipelines pump oil into Russia. That is a source of discomfort for the former Soviet Republic.

For Kazakhstan, a country with about 3% of the world’s proven oil reserves, a pipeline to China makes economic sense right now, while a pipeline to India is simply not possible. With the increasing prevalence of Oil & Natural Gas Corporation Limited (NSE:ONGC) in the country, it might be an Indian concern that sparks the process.

India needs to secure its energy future, and Kazakhstan is unlikely to put off the yoke of Russian control in order to invite Chinese hegemony. There are advantages for both nations to link their countries with a pipeline.

The route, however, is fraught with danger, and therefore expense. Unless the price is right, neither country will push for the project. Given the current state of Central Asian politics, and the fact that any pipeline would also have to travel across Pakistan, the project is unlikely to come to fruition any time soon.

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