Oil rekindles Indo-Russian affair

Posted in Russia | 06-Dec-04 | Author: Sergei Blagov| Source: Asia Times

Russian Deputy Prime Minister Alexander Zhukov addressing a meeting in New Delhi
MOSCOW - India could sharply raise its Russian energy stakes by committing billions of dollars to develop oil and gas fields in Russia. With a series of hydrocarbon deals likely to be clinched during President Vladimir Putin's December visit to India, Moscow seemingly aims at building a strong partnership with India in the energy sector.

Russia and India have long discussed investments by India's Oil & Natural Gas Corp (ONGC) in Russia. "Russian companies are keen to invest heavily in India in core sectors like energy," Russian Deputy Prime Minister Alexander Zhukov announced on the eve of Putin's trip, which is due to start on Friday. He indicated that Moscow was "looking at possible cooperation in oil and gas". Zhukov said inter-governmental negotiations were on to resolve the issues hindering bilateral investment growth.

India already holds a 20% stake in the energy-rich Sakhalin-1 block, in which state-owned ONGC Videsh has made the largest overseas investment of $1.7 billion, which is expected to go up to $3.5 billion in the exploration stages. Last week, the cabinet committee on economic affairs approved an ONGC Videsh proposal for an additional investment of $1.07 billion in the Sakhalin-1 oil and gas field in Russia. The investment would be over and above the $1.7 billion already approved.

The Sakhalin-1 project is to begin natural-gas production in late 2005. It is likely to generate up to 8 million tons of oil and 9.5 billion cubic meters of natural gas a year eventually. The $12 billion project at Sakhalin-1 ExxonMobil is run by ExxonMobil with a 30% stake in the project, while Sodeco of Japan has a 30% share and Russia's Rosneft 20%. Sakhalin-1's potential recoverable resources are 2.3 billion barrels of oil and 17.3 trillion cubic feet of gas. ExxonMobil reportedly spent $60 million on Sakhalin-3.

India could become a major player in Sakhalin. Zhukov also said Russia had no objections to ONGC Videsh bidding for equity stake in Sakhalin-3 block. "We would like foreign companies to come into oil and gas exploration and so we would welcome ONGC to bid for Sakhalin-3."

India reportedly is mulling investing $1.5 billion in the Sakhalin-3 gas field and another $1.5 billion in the joint Russian-Kazakh Kurmangazy oilfield in the Caspian Sea, which has a potential of up to 1 billion tonnes of oil. India's interest in the geographically close Caspian region hardly comes as a surprise. However, the Russian invitation to India to join the Sakhalin-3 project is indicative, notably because Moscow removed a US oil major from this giant gas field.

Last January, the Russian government decided to annul the 1993 tender to explore the project in the Pacific Ocean - a move that US officials called worrisome and potentially harmful to US-Russia ties. The original Sakhalin-3 tender was won by a consortium led by the world's largest oil company, ExxonMobil, back in 1993, when Sakhalin island north of Japan used to be seen as a new hydrocarbon bonanza in northern Asia-Pacific. Six Sakhalin offshore blocks have been seen as potentially among the largest 21st-century energy projects. Sakhalin crude and natural gas are aimed at nearby Japan, which is understood to count on Sakhalin to cut its dependence on oil supplies from the Middle East.

Sakhalin-3 consists of three blocks - Ayashsky, Kirinsky and Odoptinsky - with combined estimated reserves 4.6 billion barrels (620 million tons) of oil and 770 billion cubic meters of gas. Russia has said the government wants up to $1 billion for a license to develop Sakhalin-3. Despite the years that have gone by since ExxonMobil won the tender, it has done little to move the project toward the development stage. The delay was due to ExxonMobil's lengthy and fruitless negotiations to gain production-sharing agreement (PSA) status for the project, which would provide investors with considerable tax breaks. In 2003, the Russian parliament voted not to give a PSA to Sakhalin-3.

In yet another gesture toward New Delhi, Moscow could allow Indian oilers to bid for embattled Russian oil major Yukos. The state-run ONGC could bid for acquiring Yukos assets, petroleum secretary S C Tripathi has announced. "The ONGC has discussed bidding for Yukos assets at a very preliminary level. It is a good idea and we have asked them to go ahead," Tripathi has said. He even said ONGC could look for an alliance with such firms as Gazprom of Russia because of the huge sums involved in the deal.

Russia is putting up for auction Yukos' main oil-producing unit, Yuganskneftegaz, and has set $8.7 billion as the starting price for the auction on December 19. Presumably, for Moscow, an Indian buyer for Yukos assets could be seen as an alternative to Western oil and gas majors, with their sensitivity to the political aspect of the Yukos affair.

Russia's state-run gas monopoly Gazprom is also eyeing a partnership with India. GAIL (Gas Authority of India Ltd) recently announced that it has reached an agreement with Russian gas firm Gazprom for jointly developing gas projects in India and abroad. "Both companies have initiated an agreement for strategic cooperation in the hydrocarbon sector in India, Russia and other countries," according to a GAIL statement. The plan includes pipeline projects of gas supply as well as gas processing, the statement said.

New Delhi's interest in an energy partnership with Moscow hardly comes as a surprise. India, Asia's fourth-biggest economy, is looking for stable and diversified crude supplies as it imports some 70% of its oil needs. Russian energy overtures toward India could also signify Moscow's inroads into the oil market, currently controlled by Saudi Arabia and other Persian Gulf states.

ONGC's possible acquisition of Yukos assets would give Indian oilers an unprecedented access to Russian hydrocarbon riches. A couple of years ago Russia prevented Chinese oil firms from bidding for the much-smaller Slavneft oil company. In economic terms, Moscow is seemingly keen to diversify its international energy dealings. In other words, the Kremlin would prefer to avoid over-reliance on Western markets to sell its oil and gas.

Indian Petroleum Minister Mani Shankar Aiyer recently visited Russia to boost energy cooperation between the two countries. "In the first half century of Indian independence, Russia guaranteed our territorial integrity. And in the second half, it may be able to guarantee our energy security," Aiyer was quoted as saying. This emerging partnership could also help Russia to guarantee its freedom as an independent oil supplier.

Sergei Blagov covers Russia and post-Soviet states, with special attention to Asia-related issues. He has contributed to Asia Times Online since 1996. Between 1983 and 1997, he was based in Southeast Asia. In 2001 and 2002, Nova Science Publishers, New York, published two of his books on Vietnamese history.