ONGC Videsh seeks tax relief to save Imperial buy

By: and |
New Delhi | Published: December 10, 2014 2:07:57 AM

Lobbies government to take up matter at Putin summit

On its own, OVL is redoing the entire exploration programme for the under-performing asset. On its own, OVL is redoing the entire exploration programme for the under-performing asset.

In a desperate bid to turn around Imperial Energy, its worst overseas buy, state-run ONGC Videsh will seek a slew of tax concessions from Russian President Vladimir Putin arriving here late on Wednesday for a two-day visit. Taxes account for nearly 80% of OVL’s revenue from crude oil sales at Imperial Energy and relief on this front could help the Indian firm to salvage the distressed asset.

OVL had, in 2009, lapped up the hydrocarbon assets of the UK-listed firm in Russia’s Tomsk region for a whopping $2.1 billion and it has since spent $300 million to develop the same. But the assets have belied its expectations with the output dropping drastically to 7,000 barrels per day (bpd) versus 80,000 bpd assumed initially.

A director on the board of OVL told FE that the explorer has put up a ‘wish list’ before the Indian government, urging it to take up the same with Putin. “We are hopeful that tax sops would be granted to make Imperial assets economically viable. Currently, net of taxes, we are getting only 20-22% of the crude oil price, which obviously is not sustainable,” he said.

For example, on crude oil price of $100 per barrel, Imperial Energy has to pay around $9 a barrel as transportation tax; $20-23 per barrel as mineral extraction tax (MET); and another $40-45 a barrel as export tax. This takes the tax component to about $77 per barrel, leaving just $23 a barrel as net realisation for the explorer.

“We have escalated the issue of tax relief for Imperial Energy at the highest level. This is one of the most important things the ministry of external affairs is likely to take up with the visiting Russian delegation,” a top petroleum ministry official told FE on Tuesday.

Specifically. India would seek exemption from MET and export tax from the Russian government for the asset, said sources.
On its own, OVL is redoing the entire exploration programme for the under-performing asset.

It has adopted a two-step strategy to inject a new lease of life into the asset: To begin with, it will reduce the staff strength from the current 650 and review both conventional and unconventional data across its acreages in the Tomsk region of Western Siberia aiming for exploitation of economically viable hydrocarbon.

NK Verma, OVL managing director, declined to comment on the plan to seek tax breaks. He, however, said efforts have been undertaken to improve production from Imperial Energy assets.

In 2012, Moscow rejected special tax concessions to the state-owned ONGC’s Siberia-focused firm Imperial Energy, citing that the taxes were universally applicable to all firms working in the region. Though Russia had declared some tax incentives last year, OVL claims they aren’t adequate on account of the prohibitively high cost of extraction from tight oil assets in Siberia because of bad terrain, cold climate and high taxes.

The Western sanctions slapped on Russia for its involvement in Ukraine have added to the difficulties being faced by Imperial Energy, said official sources in the government. Deploying equipment and technology, available with Western companies, has now become all that much more difficult.

With oil diplomacy one of the primary focus areas of the Prime Minister Narendra Modi-led government, petroleum minister Dharmendra Pradhan had sought external affairs minister Sushma Swaraj’s help for more tax breaks for Imperial’s tight oil reservoirs.
India-Russia collaboration in the hydrocarbon sector could also include a transnational pipeline for access of Russian hydrocarbons by South Asia. Initial discussions have been held with Rosneft and the Russian government and a request to nominate Gazprom on the study group has already been made.

ONGC signed a memorandum of understanding with Rosneft for cooperation in exploration in the Arctic region on the assurance from the Russian side to allow an international oil company as well in the Arctic consortium in the near future. Sources have shared with FE that Russian assistance is required for monetisation of gas being produced in the Sakhalin block and the MEA’s intervention has been sought.

Deal pipeline

* ‘Vision document’ to be released for cooperation in key areas including, energy, trade, defence
* Agreement on joint fifth-generation fighter aircraft project
* Joint development of multi-role transport aircraft
* Development of BrahMos mini missile
* Several agreements in agro business
* Agreement on setting up a meat inspection office in New Delhi
* MoU for negotiations on Units 5 & 6 at Kudankulam nuclear power plant
* Roadmap on nuclear energy cooperation, more units in Kudankulam
* ONGC Videsh to be more rights to explore Russian oil fields
* Agreement on diamond cutting

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