Fix Sistema first, talk OVL later, firm Russia tells India

Written by fe Bureau | New Delhi | Updated: Dec 25 2012, 09:35am hrs
The Kremlin on Monday refused to accept the Indian demand for mitigating the tax incidence on Oil & Natural Gas Corporation's (ONGC) low-yielding Siberian oil fields (Imperial Energy) by according a special dispensation and insisted that Russian telecom firm Sistema be compensated adequately for the loss of licences in India for no fault of its.

Sources privy to the discussions between Russian President Vladimir Putin and Prime Minister Manmohan Singh said the Russian side has refused to de-link the Sistema issue from the demand for tax concessions for OVL, the subsidiary through which ONGC invested in Imperial Energy.

Said an official source: It is difficult to strike a bargain with Russia if no progress is made on issues raised by them. They (Russian side) are acting very tough now and want the Sistema issue resolved on time. They also indicated India could face demand for billions of dollars in compensation if the issue is not sorted out to their satisfaction.

Sistema Shyam is a 74:26 joint venture between the Russian conglomerate and India's Shyam Group. Sistema had bought into the company when Shyam bagged licences for 21 circles in January 2008 to provide CDMA-based mobile services. The company was among nine firms which had got licences from former telecom minister A Raja. Though the CBI did not charge-sheet Sistema for any irregularity in procuring the licence, the Supreme Court on February 2 cancelled all licences granted by Raja and as a consequence, Sistema lost its licences. The company along with a few others filed a review petition which got dismissed. It subsequently filed a curative petition which is still pending. The company did not participate in the November auctions and maintains that since it had committed no wrong, the government should restore its licences or compensate it for the investments made.

In 2009, OVL had acquired Imperial Energy for $2.1 billion. However, with the production from the field, situation in difficult terrain of West Siberia, being much below expectations, the investment is somewhat stressed. New Delhi wants a 10-year tax holiday on export duty on Imperial Energy since 2009 and a total waiver of mineral extraction tax to salvage OVL's investments.

Even as OVL's investments in Sudan and Syria has been impacted by adverse geo-political conditions, it has recently clinched an allegedly overpriced $5 billion deal for for 8.4% stake in assets in North Caspian Sea.

As per Russia's rules, OVL is supposed to pay a 35% mineral exploration tax plus a corporate tax of 50%. With production from Imperial Energy remaining low, this is hurting the company. Current production from Imperial Energy stands at 12,000-15,000 barrels per day, which is much below the projected 45,000 barrels. The Russian government has rejected the OVL proposal for tax rebate since the Indian government has imposed some sort of issues on its telecom venture Seistema, said Ashutosh Bharadwaj, senior research analyst, Nirmal Bang Institutional equities.

Meanwhile, at the end of the day-long summit meeting, the two sides agreed to intensify efforts to enhance mutual investments in exploration and production of oil and gas in both the countries and joint ventures in upstream and downstream activities in India, Russia and third countries.

Also on the table was Indian oil PSUs' interest in acquiring equity stake in discovered / producing assets and in proposed LNG liquefaction projects in Russia along with Russian oil and gas companies as well as in procuring Russian crude oil and off-take of LNG for India.

Both sides noted that to promote exploration and production cooperation between the two countries, it was essential to source oil and gas from Russia and leverage the market and downstream business in India with involvement of respective oil and gas companies of both the countries, ONGC Videsh in Russia for upstream business and Rosneft in India for downstream business.

While the both sides noted that the gas supply to India by Gazprom Group will be a stable and reliable source of resources for the development of Indian gas market, they also welcomed the conclusion of long term LNG Sales and Purchase Agreement for the supply of 2.5 MMTPA of LNG between "Gazprom Marketing and Trading Singapore and GAIL and expressed hope for continuation of cooperation in the sphere of LNG supply.