OVL caught between a rock and a hard place over its investments in Muglad basin blocks

ONGC Videsh Ltd (OVL) appears to have no choice but to adopt a wait and watch policy over its investments in the contentious border region between Sudan and South Sudan. ONGC chairman Sudhir Vasudeva has said he is hopeful that production from blocks in the Muglad basin would restart in March 2013. This massive basin straddles both countries.

On November 10, declaring its results for the six months ended September 2012, OVL noted: "Post secession of South Sudan from Sudan in 2011, Blocks 1,2 and 4 straddle between the two countries and Block 5A is now entirely in South Sudan."

OVL has a 25 per cent participatory interest in the Greater Nile Oil Project (GNOP), which consists of upstream assets in the Muglad basin.

GNOP also has downstream assets, including a 1,504-km-long crude oil pipeline from the contentious Heglig region on the border to Port Sudan (Sudan), on the Red Sea.

However, the volatile relationship between Sudan and South Sudan has affected OVL and other foreign investors in the region adversely. Oil and oil supplies continue to remain a sticking point between the two countries.

Both governments earn revenues through oil sales, and can use these to hobble each other. South Sudan, a land locked country, is dependent on Sudan's pipeline for evacuation of crude oil, for export through Port Sudan. Sudan has pipelines and refineries but depends on South Sudan for much of the crude oil that is processed in them.

And companies such as OVL and China's CNPC are caught in the crossfire.

In January this year, the South Sudan government halted crude oil production, which accounts for most of its revenue, after a long-running dispute over tariffs.

What gives Vasudeva some hope is the efforts of the international community, including the African Union and the US, to get the warring sides to talk. India, too, has sent an external affairs official to hold talks with Sudan and South Sudan.

In September, the two countries reached a deal, which included setting up of a demilitarised buffer zone and resumption of South Sudanese oil exports through Sudan's pipelines.

In the statement declaring its half-yearly results, an elated OVL noted: "…South Sudan has now issued order for resumption of crude oil production and petroleum operations subsequent to the agreement between …South Sudan and …Sudan on 27th September 2012. The production from part of Block 1, 2 and 4 falling under South Sudan and Block 5A is likely to resume in next few months.

But the last week of November saw tensions flare up again when South Sudan blamed Sudan for aerial bombing that killed seven civilians.

For now, Vasudeva will have to keep his fingers crossed.