ONGC seeks $2.2 billion Russian redemption

Chairman says Imperial Energy, which the firm bought in 2009, is seeking bids to assess the Bazhenov formation
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First Published: Fri, Feb 08 2013. 10 55 PM IST
Sudhir Vasudeva, chairman, ONGC. Photo: Priyanka Parashar/Mint
Sudhir Vasudeva, chairman, ONGC. Photo: Priyanka Parashar/Mint
New Delhi/Moscow: Oil and Natural Gas Corp. Ltd (ONGC), stung by criticism its biggest Russian acquisition has failed to pay off, is banking on crude trapped in Siberian shale rocks to redeem its $2.2 billion wager.
Imperial Energy Corp., which India’s biggest oil explorer bought in 2009, is seeking bids from surveyors to assess the Bazhenov formation, ONGC chairman Sudhir Vasudeva said in an interview, without giving details. Bazhenov may hold as much as 360 billion barrels of recoverable reserves, Bloomberg said in a 19 December report, citing estimates by Russian subsoil agency Rosnedra. Venezuela holds 296.5 billion barrels, the world’s biggest known oil reserves.
The US shale boom, which reinvigorated industry and is leading the world’s largest economy toward energy independence, has spurred oil companies to blast open shale rocks in other parts of the world. ONGC, seeking to raise overseas production more than sixfold by 2030, is also betting Russian tax breaks on oil extraction will help stem Imperial’s 35% decline in output in the last three years.
“ONGC’s challenge will be to find a viable way to produce the oil,” said Gagan Dixit, a Mumbai-based analyst with Quant Broking Pvt. Ltd, who has a buy rating on the stock. “Tight oil requires specialized technology and costs are high. The tax benefits will be a first step.”
ONGC shares fell 2% to Rs.313.60 at the end of trading in Mumbai. The shares have advanced 17% this year, beating a 0.3% advance in the BSE’s benchmark Sensex.
Bazhenov, which has yet to yield oil, has proved to be a tougher shale block to drill than areas in the US, prompting Russian oil majors such as OAO Rosneft and OAO Gazprom Neft to seek partnerships with Exxon Mobil Corp., Royal Dutch Shell Plc and Statoil ASA.
Tight oil is so called because it is trapped in non-porous shale rock formations, also found in the Bakken area in North Dakota that has helped the US cut crude imports. The oil can be extracted by cracking open the rocks using a mixture of water and chemicals at high pressure, a process pioneered in the 1990s in the US. Different technologies need to be used and modified for different types of shale and tight reservoir structures, Vasudeva said.
“It may turn out to be very important for us in Russia,” said Vasudeva. “It’s still very early days and we have to see how it turns out in the months to come.”
Current output at Imperial’s fields in western Siberia has declined to 11,000 barrels a day from about 17,000 barrels in April 2010. Production may drop 17% to 512,900 tonnes, or about 10,000 barrels a day, this year from 621,100 tonnes in 2012, according to a 17 January statement on Imperial’s website. The decline is because the company is searching for an economically feasible technology to recover oil from tight reservoirs, according to the website.
“We’re hoping the shale and tight oil will help revive that,” Vasudeva said. “We’re getting more confident.”
Imperial is also seeking an exemption from the Russian government from paying taxes for oil production from tight reservoirs, according to the website. The nation’s energy ministry has proposed 15-year tax exemptions on oil extracted from the Bazhenov deposits, according to a ministry document. While export duties would remain, the tax cut would be worth an additional $20 a barrel to producers, based on a price of $100 a barrel, according to the document.
ONGC is planning to spend Rs.11 trillion by 2030 as it seeks to add assets and boost production at home and abroad. ONGC Videsh Ltd, the company’s overseas unit and owner of Imperial Energy, needs $20 billion as it targets production of 20 million tonnes (mt) of oil equivalent by March 2018 and 60 mt by March 2030 from 8.75 mt in the year ended 31 March, according to the company’s annual report. Bloomberg
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First Published: Fri, Feb 08 2013. 10 55 PM IST