The acquisition in CSJC Vankorneft, an OAO Rosneft subsidiary, will give ONGC Videsh 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.
This purchase in Russia’s second-largest oilfield by production, which accounts for 4% of the country’s production, comes in the backdrop of the 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.
“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.
This stake will give the overseas arm of Oil and Natural Gas Corp. Ltd (ONGC) 3.3 mt of oil per annum as per its entitlement, with the effective value date of the agreement being 31 May. The firm is evaluating whether to bring the cargo to India or sell it in the international markets, depending upon freight economics.
“The daily production from the field is around 442,000 bpd (barrels per day) of crude oil on an average, with ONGC Videsh’s share of daily oil production at about 66,000 bpd," ONGC said in a statement.
India has been trying to secure energy resources in Russia by leveraging its historical association with the country. Indian investments in Russia, mainly in the hydrocarbon sector, total around $4.25 billion.
“ONGC Videsh will have two places in the board of directors of Vankorneft. Rosneft will create an operator company that will allow more efficient management of both the Vankor field and other company’s licences in this region," the Rosneft statement said.
“The agreements on considering acquisition of minority share in Vankorneft by ONGC Videsh were reached on 8 July 2015 during the meeting between President of the Russian Federation Vladimir Putin and Prime Minister of the Republic of India Narendra Modi in Ufa," Rosneft said.
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 deal is expected to close by the middle of 2016," Narendra K. Verma, chief executive officer and managing director of ONGC Videsh, said from Vladivostok where he inked the agreement with Igor Sechin, chairman of the board of directors at Rosneft.
“It is a Sakhalin moment for us," said S.P. Garg, director of finance at ONGC Videsh. “In the near term, our focus is on acquiring producing assets, at the same time not ignore our long-term objectives."
ONGC Videsh owns a 20% stake in the Sakhalin-1 hydrocarbon block, which it bought in 2001. It also bought the Russian assets of the UK’s Imperial Energy Corp. Plc in 2008 for $2.1 billion. This acquisition failed to meet projections and prompted the Comptroller and Auditor General of India to fault the purchase.
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 from the current levels of 8.87 mt of oil and oil equivalent.
Analysts termed the deal a “very positive development".
“In the backdrop of slow transaction activity in the oil and gas upstream market, this transaction is a very positive development. It also departs from the trend over the last two years of non-NOC (national oil company) transactions, primarily in the US unconventional market," said Deepak Mahurkar, leader (oil and gas) at PwC India, a consultancy.
Explaining the strategy behind raising resources for the Russian purchase, Garg said the alternatives before the firm include raising the money from parent ONGC or raising it from the market.
ONGC Videsh is unperturbed by sanctions imposed by specific countries, as it “honours international multilateral sanctions such as those imposed by the United Nations".
“That is why we are comfortable. There may be some challenges due to banking transactions with reference to the payments for the deal and transfer of dividends to us, but we have spoken to certain banks and we don’t see any problems," said Garg.
The European Union and the US imposed sanctions after Russia absorbed the Ukrainian region of Crimea following a referendum that approved the secession. The US and Russia imposed tit-for-tat sanctions, targeting lawmakers and government officials. The sanctions have resulted in the freezing of assets within jurisdictions and barring of domestic firms from conducting business in the other’s space.
As a result, oilfield service contractors such as Halliburton Co. and Baker Hughes Inc. have withdrawn from ONGC Videsh’s assets in Russia in the wake of the sanctions. Also, Denver-based Liberty Resources Llc, which was offered up to a 30% economic interest in Imperial Energy, walked away.
ONGC Videsh 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.