Global Insight Perspective | |
Significance | ONGC Videsh agreed to pay 1,250 pence/share for each share of Imperial Energy, which produces less than 10,000 boe/d in Russia at present but has the rights to reserves of nearly 1 billion barrels and plans to increase output to 25,000 boe/d by year-end. |
Implications | ONGC, which has a minority stake in Russia's Sakhalin-1 project and has long sought to increase its access to Russian oil reserves, reportedly outbid Sinopec for Imperial Energy, although the Chinese state refiner does not appear to have put up much of a fight for the small Russian-focused oil firm. |
Outlook | Although the Russian government may well approve the deal—partly in an effort to encourage improved relations with Asian countries as Russia's relations with the West continue to worsen—in all likelihood ONGC Videsh will be prodded to sell part of Imperial Energy to Russia's state-owned Rosneft as a condition of the acquisition. |
India Wins One
As China and India, the world's two most populous nations, have increasingly sought to secure access to overseas oil and gas assets to feed their growing economies, the competition has been fairly one-sided. China's aggressive bidding in the past couple of years has seen its state-owned companies trump Indian bids in head-to-head clashes for prizes such as Canada's PetroKazakhstan and the Marathon and BP-operated Block B in Angola. With South Korea's National Oil Corp. (KNOC) and Japanese state-backed companies also taking an increasingly aggressive approach to investing in overseas hydrocarbon projects in order to secure oil and gas supplies, India's Oil and Natural Gas Corp. (ONGC) is clearly being pushed to do likewise.
Thus, having courted U.K.-based Imperial Energy for the past few months, yesterday's news that ONGC Videsh, the overseas arm of ONGC, had agreed to a deal to acquire Russian-focused Imperial is a much-needed victory for India's interests. Imperial, which produced around 7,000 boe/d in the Tomsk region of Siberia in 2007, said that ONGC Videsh would pay 1,250 pence/share for each of its shares, equivalent to approximately £1.4 million (US$2.6 billion). Imperial founder and chairman Peter Levine said that the company's directors "intend unanimously to recommend shareholders accept the proposed offer."
Imperial had said that it has received an offer of 1,290 pence/share last month from an unnamed bidder, which was widely reported to be ONGC, but the slide in oil prices over the past few weeks, together with an easing of Imperial's share price, appears to have resulted in a lower acquisition price (see "Related Articles" below). Moreover, a hoped-for bidding war for Imperial between ONGC and China's Sinopec did not materialise, as Sinopec was invited to do due diligence on Imperial but did not undertake more than a preliminary effort. For its part, KNOC denied earlier this week that it was interested in acquiring Imperial.
What Did ONGC Win?
The lack of true competition for ONGC over Imperial is likely to be down to several factors. Imperial is clearly somewhat below the radar in terms of its current oil production, but the company does have good growth potential, with proven plus probable reserves in Siberia of 920 million barrels. Indeed, the company plans to increase output to 25,000 boe/d by the end of the year. However, Russian auditors have questioned the size of Imperial's proven reserves, and the U.K.-based company has run foul of Russian authorities in the past over its reserves classification—although last year Imperial did manage successfully to end a dispute with Russia's Natural Resources Ministry over this issue.
Nevertheless, Imperial's resource base is well removed from the Indian market, with little likelihood that any future production from the company's assets in Siberia would actually be sent to India. Moreover, the Russian government may yet insist that ONGC Videsh sell part of Imperial to Rosneft, the Russian state-run oil giant, as a condition of its approval for any deal involving Imperial. ONGC, taking into account the trend in Russia towards greater state control over the domestic hydrocarbon industry—and cognisant of Sinopec's own experience in acquiring the Udmurtneft production unit in 2006 from TNK-BP, only to sell a 51% stake to Rosneft—said that it has already initiated parallel discussions with the Russian government about a potential stake sale of Imperial to a Russian firm, most likely Rosneft.
Outlook and Implications
Regardless of the conditions surrounding ONGC's agreed takeover of Imperial, a final deal that allows the Indian state-run firm to secure a toehold in Siberia will still represent a step forward in the company's goal of gaining greater access to oil and gas supplies overseas. Even if Imperial's output never makes it to the Indian market, ownership of these resources in Siberia will provide ONGC a hedge against rising energy costs, as well as a much-needed "psychological win" over China in the battle for access to oil and gas resources outside their own borders.
For Russia, the ONGC acquisition of Imperial, and the subsequent entrance of the Indian state-run firm into Russia's main oil province, could serve the government well in boosting ties with India and thus partially offsetting Russia's worsening relations with the West. Russia's invasion of Georgia, and the subsequent unilateral recognition of the independence of the Georgian separatist regions of South Ossetia and Abkhazia by the Russian presidential administration at the Kremlin, has put the country at odds with Europe and the United States, which have strongly opposed Russia's actions. Appearing determined to stand up for its interests, even if it means a confrontation with the West, the Russian government may well seek to foster greater ties with Asian countries—perhaps offering greater access to Russia's vast energy sources as leverage—in order to avoid international isolation over its stance in Georgia.
Related Articles
India: 21 August 2008: ONGC Wins Government Approval for Imperial Energy Bid
Russia: 4 August 2008: Sinopec Launches Competing Bid for Imperial Energy
Russia: 15 July 2008: Shares in Russian-Focused Imperial Energy Jump on Report of Approach from India's ONGC
Russia: 3 June 2008: Imperial Energy Announces Discovery in Western Siberia
Russia: 10 December 2007: Imperial Energy's Western Siberian Exploration Licences Extended
Russia: 22 November 2007: Imperial Rejects Gazprombank Bid
United Kingdom: 2 November 2007: Imperial Receives Unsolicited Bid for 25% Stake
Russia: 20 September 2007: Imperial Stock Jumps as Russian Watchdog Confirms Reserves
Russia: 16 July 2007: Natural Resources Minister Says Imperial Energy Inflated Reserves in Russia
Russia: 19 April 2007: U.K.'s Imperial Energy Faces Threat to Russian Production Licence