India firm buys stake in Mozambique gas field

India’s Oil and Natural Gas Corp (ONGC.NS) has agreed to buy a 10 percent stake in a gas field offshore Mozambique from Texas-based Anadarko Petroleum Corp for $2.64bn.

ONGC is aiming to offset diminishing supplies from domestic gas fields by buying overseas assets, according to the Reuters news agency.

Anadarko’s (APC.N) stake is the latest in a handful of overseas assets that ONGC Videsh, the overseas business unit of state-controlled ONGC, has bought in the past couple of years to boost India’s energy needs.

In June, ONGC and state-run Oil India Ltd (OILI.NS) signed a deal to buy a 10 percent stake in a Mozambique gas field from Videocon Group (VEDI.NS) for $2.48bn.

“There is a lot of energy demand and whatever volumes of gas we are able to bring to the country are of utmost significance,” A K Srinivasan, ONGC’s group general manager for finance, told Reuters. “Mozambique will be a big LNG hub for the future.”

Anadarko said it would remain the operator of Area 1, with a working interest of 26.5 percent in the block, which is located in Mozambique’s deepwater Rovuma Basin.

Recent discoveries have turned the Rovuma field into a major draw for global energy producers and boosted Mozambique’s natural gas reserves to around 150 trillion cubic feet or enough to supply Japan, the world’s top LNG importer, for 35 years.

Rovuma has the potential to become one of the world’s largest liquefied natural gas (LNG) producing hubs by 2018, and is strategically located to supply gas to India at competitive prices.

Internal cash balance 

ONGC, which expects the cash transaction to close by March 2014, is likely to finance the deal through internal cash balance and fresh borrowings, Srinivasan said, adding that financing details would be finalised over the next few months.

The company’s bonds were trading at marginally wider spreads on Monday, underperforming tightness in the market, and shares fell as much as 3.8 percent in the Mumbai market .NSEI that was trading flat, on worries about its higher debt levels.

Analysts expect ONGC’s two recent acquisitions to lead to higher debt levels, although a credit downgrade is unlikely.

“Given current market conditions and uncertainty about India, financing may be a challenge and we think most of it will come from the bank market. That said, a potential bond activity cannot be ruled out,” a U.S. bank said in a note.

ONGC, which has struggled to maintain output from its ageing wells off India’s west coast, will be interested in buying more overseas assets to feed the energy needs of Asia’s third-largest economy, Srinivasan said, but declined to give details.

“The country is starving for gas, for our power development and any other development,” he said.

Demand for gas in India far outstrips consumption, but prices have been kept low for strategic industries, deterring investment in the sector. India has few energy resources other than coal and is the world’s fourth-biggest importer of fuel.