India Buys In to Sakhalin Project

An Indian oil company is to receive a stake in the Sakhalin-1 offshore oil and gas project in return for an order for Russian armaments in a deal that brings a windfall to state-owned oil major Rosneft, sources said Tuesday.

Under the deal, which arose after President Vladimir Putin visited the subcontinent in October, Rosneft has agreed to pass on half of its 40 percent stake in Sakhalin-1 to Indias Oil and Natural Gas Corp.s international arm, ONGC-Videsh Ltd., or OVL.

Under the agreement, OVL will pay Rosneft $200 million and cover the companys previous expenses in the project of about $100 million to $150 million, and it will also fund Rosnefts participation in Sakhalin-1 until the project starts to make a profit.

The initial, loss-making stage of the project is to be completed by 2005, before which the Sakhalin-1 participants are due to invest $4 billion. Once Rosneft is left with a 20 percent share, it will be required to invest $800 million. Now OVL will be picking up the bill.

OVLs conditions will most likely force Rosnefts old partners in Sakhalin-1 U.S. giant ExxonMobil and Japans Sodeco to waive their preferential option to purchase the 20 percent stake, said a source close to the Property Ministry.

"OVL is offering an unjustifiably high amount [for the 20 percent stake]," the source said. "Most likely this has all been resolved by political and international relations."

"Putin promised that he would sell a share in Sakhalin to India. This is definitely a condition for selling Russian aircraft to India," said a source close to the Energy Ministry.

Putins visit to Delhi in October initially appeared not to have brought any significant results, and Russia reduced the value of military hardware it plans to sell to India.

Now it emerges that the reduction was made for a reason it is almost equal to OVLs costs in the deal with Rosneft. During the visit, it was anticipated that two contracts licensing production of the new SU-30MKI fighter and T-90C tanks in India would be signed. India wasnt overly excited about the terms, however. According to unofficial sources, the tank contract fell in price from $880 million to $520 million, while the price of the Su-30MKI deal signed in December last year was slashed by $700 million. Initially it was proposed that India would pay $4 billion for the license.

This "political" deal between Russia and India could be extremely good news for Rosneft, which announced in 1998 that it planned to sell off half of its Sakhalin share but failed to find a suitable buyer.

Rosneft is happy that everything ended this way. "Sakhalin is a risky project so far research has been carried out that has not given complete information as to how profitable it actually is," said Rosneft press secretary Alexander Stepanenko.

"Rosneft hopes that once we have sold our share we wont lose the money that we could have earned from implementing the project."