Niko Resources abandons India offshore gas project

offshore_drill_ship_India — Niko Resources Ltd. said it’s abandoning an offshore natural gas prospect in India where the Calgary firm’s CEO once suggested the prize could be twice the size of the nearby project where the company generates most of its cash, news that on Tuesday sparked a stock sell-off causing Niko’s share price to touch its lowest in more than eight years.

Shares of Niko rebounded to close down 48 cents or one per cent at $33.58, after plunging 18 per cent to a low of $27.81 earlier in the day. The firm’s share price is down 30 per cent this year.

Niko chief executive Ed Sampson said the company and its partners are relinquishing their interests due to the Indian government’s price controls on oil and gas, slow permitting process and an assessment that the D4 block contains less gas reserves than previously assumed.

“It’s a small portion of Niko’s prospectivity,” Sampson said of the deepwater exploration project off India’s east coast, in an interview. “From D4’s end of it, certainly our geological model would indicate less (reserves) than we originally thought.”

Niko, the 15 per cent owner of the D4 block with BP PLC (30 per cent) and operator Reliance Industries Ltd. (55 per cent), said in a release Tuesday that the three partners are giving up their interests in the block due to “the most current geological assessment related to the size and risk of the trapping mechanism and current commercial environment in India.”

In 2010, India’s Economic Times quoted Sampson as telling investors that D4 could be double the size of the Reliance-operated D6 block, with more than 100 trillion cubic feet of gas.

D6, where production has been in decline, still represents about 80 per cent of Niko’s cash flow, noted research analyst Martin Molyneaux of FirstEnergy Capital Corp., who said the perception on D4 was that it was a “big, juicy” new opportunity for Niko.

FirstEnergy’s view on the value potential of Niko’s near-term portfolio of projects, factoring in risks, is about $300 a share, with D4 accounting for 10 to 12 per cent of that, he said, noting other global projects represent a bigger share, including Indonesia — “front and centre” in Niko’s growth plans.

Molyneaux said he was “shocked” by the news from Niko, which he said came “completely out of the blue,” but that the project may have been cast aside partly to send the Indian government a message about its energy policy.

Niko, BP and Reliance have long been engaged in a legal fight with the Indian government over gas prices they’re allowed to earn through a contract at the Reliance-operated nearby D6 project.

Sampson pointed out on Tuesday that the firms are paid three to four times less for their domestically-produced gas than what India will pay to import gas in liquid form, on tankers.

He said he’s optimistic the dispute with the Indian government can be resolved, following a judicial ruling last Friday that the current gas contract between the companies and government can be renegotiated.