OVL, India interested in acquiring 10% more of Russian oil firm
State-owned ONGC Videsh Ltd (OVL) has evinced interest in acquiring another 10% in Russia’s second-largest oilfield (by production), owned by OAO Rosneft, taking its total stake in CSJC Vankorneft to 25%, a person familiar with the matter said.
The move makes sense, said analysts, pointing to Rosneft’s need for money and India’s own efforts in the area of energy security.
said: “At the moment we have agreed for a 15% stake.” A Rosneft spokesperson denied this. In response to a query about OVL’s interest in acquiring another 10% stake in Vankorneft, N.K. Verma, managing director of OVL,
An ONGC spokesperson declined comment.
The person familiar with the matter, who asked not to be identified, said the 10% additional stake was that which was originally offered to China National Petroleum Corp..
OVL, Mint learns, is also considering other acquisition opportunities in Russia.
Earlier this month, OVL, the overseas arm of Oil and Natural Gas Corp. Ltd (ONGC), said it was buying a 15% stake in the OAO Rosneft subsidiary for $1.26 billion.
At that price, the additional 10% stake will be valued at around $840 million. The deal was structured with crude oil prices pegged between $60 and $70 per barrel.
Rosneft claims to have the world’s lowest production cost per barrel of $2.8 per barrel.
Indian investments in Russia, mainly in the hydrocarbon sector, total around $4.25 billion. OVL has invested $23.81 billion in overseas assets till date.
The acquisition in CJSC Vankorneft will give OVL access to the crude oil being produced by the company. Vankorneft operates the Vankor field, in the Turukhansky district of Krasnoyarsk province, which has an output of 22 million tonnes (mt) per annum. A 15% stake will give OVL 3.3 mt of oil per annum as per its entitlement, with the effective value date of the agreement being 31 May. A 25% stake would give it 5.5 mt of oil a year.
OVL’s acquisition of a stake in Russia’s second-largest oilfield by production, which accounts for 4% of the country’s oil output, comes in the backdrop of a dramatic fall in international energy prices, which has made oil-producing countries financially vulnerable. Russia is particularly at risk because it has to additionally cope with the impact of sanctions imposed on it by Western nations after it annexed Crimea and backed rebels in neighbouring Ukraine.
“Rosneft needs money. This field is its crown jewel,” the person familiar with the matter added.
On Tuesday, at a press conference, D.K. Sarraf, chairman and managing director, ONGC, and OVL’s N.K.Verma declined to comment on the price of crude oil to which the Vankorneft deal was pegged.
Commenting on the previously announced 15% stake OVL is buying in Vankorneft, Sarraf said, “This acquisition re-emphasises the relationship the two countries have.”
The agreement was reached during a meeting between Russian President Vladimir Putin and Prime Minister Narendra Modi in the Russian city of Ufa in July, and experts said it is an example of a government-to-government deal. India has been trying to secure energy resources in Russia by leveraging its historical association with the country.
The timing and the strategic importance of the deal are significant, one expert said.
R.S. Butola, former chairman and managing director of OVL, said, “It is good that it (the stake) has been acquired at this point of time when prices are low. It is good to have access to the resource.”
Crude oil prices for the current fiscal averaged $59.07, $63.82, $61.75, $56.30 and $47.33 per barrel for April, May, June, July and August, respectively. Crude oil prices in the Indian energy basket averaged at $84.16, $105.52, $107.97 and $111.89 in 2014-15, 2013-14, 2012-13 and 2011-12, respectively.
Russia and India are also exploring the possibility of constructing transnational crude oil and gas pipelines.
“Rosneft’s help can be used in reviving Imperial by seeking tax concessions. Vankorneft is a small part of a bigger play ,” said the person quoted above.
OVL has been struggling with Imperial Energy. It paid $2.1 billion three years ago to tap the company’s Siberian deposits as part of an effort to secure energy assets overseas and reduce the country’s dependence on imports.
This acquisition failed to meet projections and prompted the Comptroller and Auditor General of India to fault the purchase.
“The initial recoverable reserves of the Vankor field by 1 January 2015 are estimated at 476 million tonnes of oil and condensate and 173 billion cubic metres of gas. The acreage of the field is 447 sq. km,” Rosneft said in a statement.
India follows the US, China and Russia in energy use, accounting for 4.4% of global energy consumption. India imports 80% of its crude oil and 25% of its natural gas requirements. Petroleum product consumption in India has also been growing. According to the oil ministry, it grew 3.14% to around 163.17 mt in 2014-15.
The Vankorneft stake assumes significance given ONGC’s concerns over its domestic production capabilities and diminishing yields at its ageing oilfields. According to ONGC’s Perspective Plan 2030, the company is targeting the production of more than 130 mt of oil equivalent in 2030, of which half will come from assets owned by its overseas arm.
ONGC Videsh has set a target of 20 mt by 2017-18. It has a current production of 167,000 barrels of oil and oil equivalent gas per day and total reserves of around 647 mt of oil equivalent from its 36 projects in 17 countries.
Igor Sechin, chairman of Rosneft, the world’s largest publicly traded oil company, articulated his “Asian pivot” strategy recently. Speaking at a conference in Singapore, Sechin, one of the most powerful men in Russia, said Rosneft is directing its production towards Asian markets such as India and China due to “good compensation” and the growth offered.