New Delhi, Feb. 19: With western oil majors spending mega bucks to buy into Russian oilfields, the price of these hydrocarbon assets has shot up. The value of ONGC-Videsh’s stake in the offshore giant Sakhlin I oilfield in Russia is reported to have appreciated by around $ 500 million as a result of these aggressive purchases.
Sources disclose that western companies started eyeing Russia after the September 11, 2001 terrorist attacks on the World Trade Center in New York and signs of trouble in West Asia. However, the actual purchases picked up in the last eight months and this has led to a sharp rise in prices.
British Petroleum (BP) recently coughed up a phenomenal $ 7.5 billion for a 50 per cent stake in Tyumen Oil, a leading Russian oil company. This works out to a price of around $ 1.7 per barrel for in-place reserves of the company’s oilfields. The price of oil reserves sold eight months ago was around 80 cents per barrel. BP had also competed for the 20 per cent stake in the Sakhalin oilfield earlier but had lost out to ONGC-Videsh.
This is the second bonanza that ONGC-Videsh is reaping after the purchase of the Sakhalin oilfield was cleared by the government in January 2001. The in-place reserves of oil in the field have turned out to be 35 per cent higher than what was estimated at the time of the purchase while the quantity of gas will be 15 per cent higher.
Once commercial production starts in December 2005, India will start getting 2.5 million tonnes of oil from this field every year as compared to the earlier estimate of 2 million tonnes. Similarly, gas output will also be higher. However, the flip side is that in order to tap this larger oil and gas reserve the initial “cash sink” in the project has gone up from $ 1.75 billion to $ 2.3 billion. ONGC-Videsh managing director Atul Chandra told The Telegraph that while the initial “cash sink” has gone up this does not mean that the project cost per barrel of oil will also go up since much more oil and gas is expected to be produced than was initially envisaged. He also said the initial internal rate of return was worked out at over 13 per cent “with the explicit proviso that this would accommodate any possible surprises down the line. In any case the increased cost will ultimately be borne by the Russian government,” he added.
The returns from the project are considered so attractive that cash-rich Japanese banks have been making a bee-line for ONGC Videsh with loans at very nominal rates of interest. However, ONGC has for the present decided to stick to investing its own funds at the Sakhalin project and ensure a higher rate of return than other similar investments back home.
According to ONGC-Videsh sources, work at the Sakhalin I oilfield is progressing at a hectic pace. Contracts to the tune of $ 3 billion have already been awarded for developing the field. As many as 20 of these contracts come under the major category each valued above $ 5 million. An old platform was bought from Alaska for $ 40 million and will be refurbished at a cost of $ 140 million by Amur, a Russian company that outbid Hyundai of South Korea in a global tender.
The US company, ABB Lummus, has also bagged a contract. However, since the company has recently run into financial problems, it is being kept under close watch and the contract could be withdrawn. But the oil and gas division of the company is reported to be still functioning well. Nine ONGC officials are permanently posted with the Sakhalin consortium. The other partners in the oilfield are US giant Exon-Mobil, a Japanese consortium Sodeco and Russian company Rosneft.