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Thursday, February 24, 2005

OPI UPDATE: INDIA FINDS ENERGY SECURITY IN AN IRONIC PLACE: THE AFTERMATH OF THE YUKOS AFFAIR

India's petroleum and natural gas minister, Mani Shankar Aiyar, concluded his talks in Russia with a promise to invest $25 billion in the Russian economy. Some $20 billion of that money is expected to go into 11 joint oil and gas projects currently being negotiated between India’s state controlled Oil and Natural Gas Corporation (ONGC) and Russia’s Rosneft. While a general collaboration between the regional powers is in the interest of both, Aiyar’s discussions with Russia’s First Deputy Prime Minister Alexander Zhukov and Russian Energy Minister Victor Khristenko certainly revolved primarily around one key issue: a possible purchase by ONGC of a piece of Yuganskneftegazthat (Yugansk). India is proposing to pick up around 15 percent equity in Yugansk for some $2 billion.

In its search for greater energy security, India long been interested in investments in Russia’s energy sector. India currently imports 70% of its crude oil and is expected to import up to 85% by 2025, although recent offshore discoveries may slow that rate somewhat. India has already committed more than $2 billion in the Sakhalin-1 offshore oil and gas project in Russia’s far northeast and is considering a significant investment in the massive third phase of the project. India is also exploring the option of investing in the oil-rich East Siberia and Pechora basin. Proposals for large Indian investments in Vankor and Severny oil fields are under serious consideration.

But Yugansk is Russias most (in)famous oil prize. As recently as one year ago it formed the core of Yukos, a company that alone produced 2% of the world's crude oil. The unit was auctioned off recently at the behest of the Russian government after its CEO, Mikhail Khodorkovsky, became too politically powerful for President Putin's comfort. In a serious of moves orchastrated by Moscow, the Yugansk ended up in the hands of government controlled oil company, Rosneft.

Rosneft is only willing to sell a portion of the lucrative asset for one reason: it needs the cash. Yugansk was until recently the primary oil production unit of Yukos, before Rosneft is cash-strapped after paying the (albeit below market value) price for the asset and needs money to integrate the unit and bring production up to Yukos’ pre-auction levels of 2 million bbl/d.

India, for its part, is anxious to invest in Yugansk for several reasons. First of all, India is growing rapidly with only limited energy resources of its own to exploit. It needs to secure stable supplies of oil and gas to continue to expand at its current pace and part ownership of Yugansk would give it major pull on a large amount of Russian production. Russia now runs neck and neck with Saudi Arabia as the world’s largest crude oil exporter.

Second, India is increasingly dependent upon natural gas, with domestic demand for liquefied natural gas increasing alone increasing at more than 5% per year. Rosneft was recently purchased by Russian natural gas giant Gazprom, which controls 26% of the world’s natural gas reserves. Inside access to Rosneft is likely to mean greater access to Gazprom and thus more lucrative access to gas deals for India in the future –not to mention possible pull in getting an ever-elusive gas pipeline built from Russia to India.

While Aiyar was in Moscow, ONGC chairman Subir Raha and Gazprom chairman Aleksei Miller signed a memorandum of cooperation for several projects, though the details were kept under wraps.

India it seems has learned well from its regional rival China. Having exploded economically while trying to supply its own petroleum needs, China is now desperate to secure resources through crude oil shipments from Russia, Africa, and the Middle East –or anyone else with a barrel to spare. India is not yet in so desperate a position. They are able to drive harder bargains by gaining equity interests in projects worldwide that can then yield much more stable and lucrative supplies –which indeed is the best possible circumstance to provide energy security in an oil hungry world economy.

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