Sakhalin stalemate: India eyes equity oil; Russia for dividends.

New Delhi: The Russian Federation and Rosneft PJSC have stuck to their stand on paying dividends in lieu of ONGC Videsh Ltd’s (OVL) 20% stake in the Sakhalin-1 oil and gas field, even as India wants equity oil as agreed earlier.  

The Russian reluctance to give equity oil comes at a time of stuck dividends from Vankorneft and Taas-Yuryakh Neftegazodobycha LLC for Indian state-run firms having climbed to $600 million, two people aware of the development said.

The issue of proposed dividends from India’s most lucrative energy equity buy overseas—Sakhalin-1—came up for discussion between officials from both sides during Prime Minister Narendra Modi's Moscow visit last month to attend the 22nd India-Russia Annual Summit, but has found no resolution as yet. India, the world’s third largest oil importer, is keen on getting equity oil, at a time of continuing production cuts by the Organization of the Petroleum Exporting Countries (Opec)-plus grouping that includes Russia. In such a scenario, having equity oil rights will help India navigate uncertain energy markets. Energy security is key to India’s national security as the country imports over 87% of its oil requirements.

Also read |  OVL’s wait for dividend from Sakhalin-1 oil field lengthens

Mint has reported about the vexed issue earlier. The dividend payment for Sakhalin-1 is a new proposed arrangement, given that earlier India used to receive equity oil before the Russian government took over the 30% stake of ExxonMobil along with its operatorship. After a Russian presidential decree, while OVL received its previous shareholding in Sakhalin-1, the shares are yet to be transferred to it. Stuck dividends for Indian state-run energy firms including OVL, Bharat Petroresources Ltd (BPRL), Indian Oil Corp and Oil India Ltd from from CSJC Vankorneft and LLC Taas-Yuryakh have climbed to $600 million, given the difficulty in transferring dividend payments from Russia.

“While OVL wants equity oil from Sakhalin-1, Russia wants to make dividend payments. The issue was taken up between officials of both sides during PM Modi’s recent visit. Also, the process of OVL getting equity rights for its shares in Sakhalin-1 is yet to be completed," said one of the two people cited above requesting anonymity.

A 9 July joint statement following the India – Russia Annual Summit said, “The Sides reiterated the importance of the robust and wide ranging cooperation in the energy sector as a significant pillar of the Special and Privileged Strategic Partnership. In this context, the Sides noted the continued special importance of bilateral trade in energy resources and agreed to explore new long term contracts."

Also read |  ONGC's overseas arm retakes 20% stake in Sakhalin-1 oil, gas fields

An OVL spokesperson said in an emailed response, “The discussions with Russian Federation on transfer of stake from Sakhalin-1 to Sakhalin-1 LLC are under progress. The transfer can only take place after transfer of Abandonment Fund to Russia which has been held up due to sanctions on Russia. As regards dividends or any other payment in respect of Sakhalin-1, the same shall accrue only after formal transfer of stake."

“As regards the discussions held by Hon’ble PM with Russian authorities, ONGC Videsh is not in position to comment on the same or on the dividends of OIL, BPRL and IOC stuck in Russia," the OVL spokesperson said and added, “As regards ONGC Videsh, an amount of about USD250 MM (million) is in the Russian Accounts of ONGC Videsh."

Manifold returns

The Sakhalin-1 stake, purchased by ONGC’s subsidiary for $331 million in 2001, has yielded multi-fold revenue of $4.5 billion over the years. The Sakhalin-1 asset is spread over 1140 sq. km in far-east offshore in Russia. Japan’s Sakhalin Oil and Gas Development Co. held 30% in the project, with Rosneft units holding the remaining 20%.

In a detailed emailed response, a Rosneft spokesperson said, “The relationship between Russia and India is characterized by a strategic partnership. Rosneft Oil Company's cooperation with oil and gas corporations in India is developing along the entire technological chain, from production to refining and marketing of petroleum products."

Indian state-owned firms have invested $16 billion in Russia till date. Russia also emerged as a major supplier to Indian refiners for the first time in FY23 after it started giving oil at discounted rates amid the Ukraine war. The discounted Russian oil also helped India meet the growing demand for petroleum products.

Also read |  Indian oil cos yet to get dividends worth $300 mn-$400 mn from Russian projects

“In 2001, ONGC acquired a stake in the highly leveraged Sakhalin-1 offshore project on favourable terms (for $331 million). The Indian company's revenue in Sakhalin-1 has totalled $4.5 billion over the period. In 2022, the project's former operator, Exxon Neftegaz Limited, unilaterally halted operations at Sakhalin-1, exposing its participants to financial losses and putting the project at risk of environmental and man-made emergencies. To prevent adverse consequences, a Russian legal entity Sakhalin-1 LLC, the new project operator, was established by the Decree of the President of the Russian Federation in October 2022, and it is anticipated that the stakes of its participants will be maintained in proportion to those previously held in the consortium," the Rosneft spokesperson added.

Right to participate

“We believe that it is important to emphasize that ONGC's right to participate in Sakhalin-1 is indisputable and will be reinstated once the required procedure involving the formation of a liquidation fund within the territory of the Russian Federation. In line with the Presidential Decree, the project operator sells the project's oil and pays dividends to its participants. Operating costs to date have been fully funded by the project operator. The receipt of produced oil by participants is contingent upon the price offered aligning with market levels and the incorporation of production costs," the Rosneft spokesperson said.

Apart from a 20% stake in Sakhalin-1, OVL also holds 26% stake in CSJC Vankorneft, which is the owner of Vankor Field and North Vankor licence; wherein an Indian consortium comprising of Indian Oil Corp., OIL and Bharat Petroresources Ltd also hold 23.9% stake. RN Vankor, an affiliate of Rosneft which holds 50.1% stake, is its operator. In addition, a consortium of Indian Oil Corp., OIL and Bharat Petroresources Ltd have a 29.9% stake in LLC Taas-Yuryakh. OVL also acquired Imperial Energy Corp. Plc. that has 10 exploration and production (E&P) licence blocks in the Tomsk region of Western Siberia.

Also read |  Without Sakhalin-1 stake’ equity rights, OVL losing out on dividends

“Indian companies are stakeholders in highly leveraged projects in Russia - Vankorneft and Taas-Yuryakh Neftegazodobycha. The aggregate earnings of Indian partners in projects with Rosneft's participation were approximately $9 billion, which is nearly double the initial investment. Rosneft is strict in its payments to shareholders, and there are no dividend debts. Appropriate funds have been transferred to the accounts of the Indian partners, which they can handle at their discretion. We suggest that you address the issue of further disposal, including transfer of funds to the hostile jurisdiction of the Republic of Singapore, where a number of partners are registered, and the jurisdiction of the Republic of India, to the Indian companies. This may be connected to the varying tax regimes," the Rosneft spokesperson said.

In response to Mint' queries, an official of India's ministry of external affairs asked Mint to direct the query to ministry of petroleum and natural gas (MoPNG).

Queries emailed to the spokespersons of MoPNG, PMO, the Russian Federation embassy in New Delhi, Bharat Petroresources Ltd, Indian Oil Corp, and Oil India Ltd late on Sunday night remained unanswered till press time.