The old times in Oil and Natural Gas Corporation (ONGC) still remember how its foreign subsidiary ONGC Videsh Limited (OVL) was on the verge of closure in the early 2000s. Although OVL was established in 1965, until that time the company had only explored offshore Vietnam, which required higher investments for monetization. In 2001, when OVL started looking for new blocks overseas, the company’s previous acquisition was 13 years old. But at the turn of the century, OVL bought a 20 percent stake in giant Sakhalin-1, an oil field owned by subsidiaries of Russian state-owned Rosneft. The block became a gold buy in February 2001 and the fortunes of OVL changed. Today, Sakhalin holds about a quarter of OVL’s reserves. “At the time of acquisition, crude oil prices were pegged at $15-16 per barrel. RS Sharma, former chairman and managing director of ONGC, said, “Now, we have recovered many times and Vietnam and Sakhalin have become ONGC’s gold mines.”
After two decades and in the midst of the Ukraine crisis, much of the discussion now is based on how much oil India is importing from Russia. But there is little discussion in how much value Russia is adding to OVL’s product basket. The company had reportedly invested over $1.5 billion till the end of the last decade on Sakhalin. The oil field located in Russia’s Far East, near the Sea of Japan, began a series of acquisitions for OVL, but not all of them were successful. For example, in January 2009, OVL acquired UK-headquartered Imperial Energy for $2.12 billion. Imperial Energy had 10 production and exploration licenses for the block in the Tomsk region of Western Siberia.
But it was soon discovered that the major portions of Imperial’s reserves were in cramped structures, which required advanced technology to exploit the reserves economically. In fact, these areas were unviable and production was negligible. Being a subsidiary of a state-owned company, OVL inevitably faced criticism. In 2011, the Comptroller and Auditor General raised questions about the acquisition. In 2015, a parliamentary panel questioned why OVL did not sell some of its stake in Imperial Energy to a local company to mitigate its risks. The committee had said that it is “annoyed by the obstinate stand justifying the acquisition of Imperial Energy Corp (IEC) by OVL”.
Even insiders accept the fact that the acquisition was of a lemon. Imperial Energy remains an OVL asset. It recently implemented a pilot project by drilling four wells using the new technology and the technology is being tested in other areas as well. OVL did not respond to Business Standard’s queries. But OVL proved itself right in May 2016 by acquiring a 15 percent stake in the Vancore fields for $1.27 billion. It bought an additional 11 percent of the shares in October 2016 for $930 million. Vankor, in Eastern Siberia, is one of Russia’s largest regions by production. Like Sakhalin, this purchase also proved to be a turning point for OVL in the Russian production group.
In 2020-21, about 57 percent of OVL’s total production came from Russia, reflecting the country’s importance in its production portfolio and the success of its recent acquisitions. Of this, Sakhalin holds about 24 per cent and Vankor has 32 per cent, making OVL the top two regions in terms of production. Overall, OVL contributes slightly more than a fifth – 22 per cent – of ONGC’s total oil production. In FY21, the production of OVL was seen at 13.04 MMtoE (Million Metric Tonne Oil Equivalent). Based on industry data, India imported only about 2 per cent of its annual crude oil requirement from Russia in 2021. But more than the supply of crude, it is the revenue that OVL earns that makes the Russian asset important. In 2020-21, OVL quadrupled its net profit to Rs 1,890 crore, from Rs 454 crore in the previous year. Russia is also a golden zone for OVL in terms of reserves.
Based on estimates, 45 percent of OVL’s reserves are located in Russia, followed by Mozambique with 41 percent. Project-wise too, Sakhalin contributes 22 percent, Vankor about 15 percent and Imperial about 8 percent of the total OVL reserves. It is this success story that may have prompted the government to consider buying global energy major BP’s stake in Rosneft following Russia’s invasion of Ukraine. This decision caused a financial loss of $ 25 billion to BP. BP holds about 19.75 per cent stake in Rosneft and the government has reportedly asked companies like OVL, Bharat Petro Resources, Oil India and Hindustan Petroleum Corporation to explore the possibility of buying that stake.