Explorer Seeks $2.2 Billion Russian Redemption: Corporate India

Oil & Natural Gas Corp., 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 Industries said in a Dec. 19 report, citing estimates by Russian subsoil agency Rosnedra. Venezuela holds 296.5 billion barrels, the world’s biggest known oil reserves.

The U.S. 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 percent 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., 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 fell 2 percent to 313.60 rupees at the end of trading in Mumbai. The shares have advanced 17 percent this year, beating a 0.3 percent advance in the benchmark Sensitive Index.

Tougher Block

Bazhenov, which has yet to yield oil, has proved to be a tougher shale block to drill than areas in the U.S., 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 U.S. 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 U.S. 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.”

Falling Output

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 percent to 512,900 tons, or about 10,000 barrels a day, this year from 621,100 tons in 2012, according to a Jan. 17 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.

‘Good Face’

“They are trying to put a good face on it,” said Alexander Nazarov, an oil and gas analyst at Russian lender OAO Gazprombank. “If the company is not able to manage conventional output to the degree of 15 to 20 percent year-on-year decrease, it will not be able to deliver good enough economics for tight oil production.”

The optimistic scenario is that tight oil formations will help companies in Russia add 10 percent to their production by 2020, he said. That will help compensate annual declines of 2 percent to 3 percent, not the degree of Imperial’s drop, he said.

ONGC is planning to spend 11 trillion rupees ($207 billion) 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 tons of oil equivalent by March 2018 and 60 million tons by March 2030 from 8.75 million tons in the year ended March 31, according to the company’s annual report.

Azerbaijan, Kazakhstan

In September, the New Delhi-based explorer said it would spend $1 billion to buy Hess Corp.’s stake in an Azerbaijan field and a related pipeline. Two month later, it agreed to buy ConocoPhillips’s 8.4 percent stake in Kazakhstan’s Kashagan project for $5 billion, its biggest acquisition. ONGC has won approval for Azerbaijan and is awaiting permission from Kazakhstan’s government on the Kashagan purchase.

A plan to revive production from Imperial’s fields was scrapped just months after ONGC completed the purchase because the fields didn’t perform as expected. India’s federal auditor in March 2011 said ONGC lost 11.8 billion rupees in the 15 months ended March 31, 2010, after Imperial produced at half of the target rate.

The explorer last year backed away from buying a 25 percent stake in a second Russian producer, OAO Bashneft, after failing to agree on a price.

Exxon Mobil, the world’s biggest oil company by market value, plans to spend as much as $300 million on a pilot project with Rosneft to tap tight oil resources in Russia. The venture will explore in areas including the Bazhenov formation, Rosneft said in a Dec. 7 statement. Bazhenov may be holding billions of barrels of oil, Exxon CEO Rex Tillerson said on Oct. 8.

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