Restructuring of ZarubezhNeft casts doubts on business in Vietnam

Russian government moves to restructure ZarubezhNeft, the country's leading operator of state-controlled overseas oil projects, casts doubt on the company's main business in Vietnam, while ZarubezhNeft already faces the loss of lucrative oil contracts in Iraq.
ZarubezhNeft is now a big player in Vietnam's off-shore oil fields. It operates -- in a 50:50 partnership with PetroVietnam -- the $ 1.5 bn VietsovPetro joint venture, or VSP, which accounts for the bulk of Vietnam's oil exports. In 2002, VietsovPetro pumped 13.5 mm tons of crude, while Vietnam's overall output reached some 17 mm tons.

Apart from Vietnam, ZarubezhNeft has interests in Syria, India, Turkmenistan and Iraq until recently, while it plans projects in Algeria, Libya and Yemen. Last February, it clinched a deal with the Syrian Petroleum Company to launch the Amreet joint venture. ZarubezhNeft has also won tenders in Syria on the Sah-Mansoor and Tishreen oil fields, which are believed to be able to produce about 15 mm tons of oil. ZarubezhNeft also aims to service 100 oil wells in India.
However, earlier the Russian government released Decree No 470, which stipulates ZarubezhNeft’s reorganization into a public company by the end of 2003. In other words, ZarubezhNeft, which is now a so-called state-owned unitary enterprise, or GUP, is to become a public company, or OAO, as any other Russian private firm.

ZarubezhNeft said that its current status as a GUP involved "needless bureaucracy and paltry regulations". ZarubezhNeft also complained that as a GUP it could not decide on contracts of more than 14,000 roubles ($ 450) without the approval of the state property or energy ministries, including loans, bank guarantees and insurance, while getting each approval took at least several weeks.
However, ZarubezhNeft was keen to stress that reorganization would not amount to privatisation and that the federal government would own 100 % of the company's shares. Russian President Vladimir Putin is due to sign a special decree excluding ZarubezhNeft’s shares from any sale to private firms, the company's chief of staff Anatoly Chuchko told.

No wonder then that ZarubezhNeft is keen to dismiss the inevitable speculation about its imminent "privatisation". Although never said on the record, Vietnamese officials apparently did not like the idea of a private Russian firm operating Vietnam's main oil fields: This consideration probably kept ZarubezhNeft beyond the limits of Russia's murky oil privatisation program during the 1990s.
Obviously, ZarubezhNeft’s revamp may affect bargaining between Russia and Vietnam on how to prolong the July 16, 1991 agreement on VSP's operations. Russians had hoped to pump crude for up to 25 more years and exploit Vietnam's gas fields for up to three decades, but with ZarubezhNeft going public, these plans may change sooner than expected.

In a possible sign of displeasure over ZarubezhNeft’s revamp, earlier it was speculated that ZarubezhNeft may withdraw from a venture to exploit the Dai Hung, orBig Bear, oil field. "It is highly probable that the Russian company will pull out," an official was quoted as saying. "ZarubezhNeft has wavered over investment as exploration at some drilled wells has not brought about good results," he said, and added that "PetroVietnam will go it alone if ZarubezhNeft relinquishes the venture."
In late 2002, PetroVietnam and ZarubezhNeft reportedly agreed to invest $ 200 mm into the oil field to increase output at Dai Hung. However, the Russian company has appeared reluctant to go on with the project after drilling exploratory wells in the field, saying that the investment is risky. However, ZarubezhNeft’s Chuchko said that media allegations regarding his company's alleged withdrawal from Dai Hung were untrue.

Last fall, Dai Hung's test well produced a strong oil flow and last October VSP announced the discovery of a new hydrocarbon deposit at the Dai Hung offshore oil field at a depth of more than three km. In November, VRJ-Petroleum, a joint venture between ZarubezhNeft (50 %), PetroVietnam (35 %) and Japan's Idemitsu (15 %), decided to drill a first well to explore the adjacent 09-3 offshore block. However, the next test well at Dai Hung was not successful.
So far, Dai Hung has not been a success story at all. In 1993, Australia's Broken Hill Proprietary (BHP) won a bid for Dai Hung and announced that it could yield up to 14 mm tpy of crude oil, or 250,000 bpd. However, BHP was initially pumping 25,000 barrels and then output went down. After spending some $ 250 mm, BHP exited Dai Hung in 1997. Malaysia's Petronas Carigali took over the field, but failed to raise output and left in 1999. In 2000, VietsovPetro took over Dai Hung, and was able to pump some 300,000 tpy or nearly 50 times less than BHP expected.

Moreover, ZarubezhNeft recently withdrew from a major venture, VietRoss, to build Dung Quat, Vietnam's first oil refinery, although remaining a subcontractor in the Dung Quat project for two bidding packages worth some $ 110 mm. This was announced onDecember 25, 2002, when Russian deputy Prime Minister Viktor Khristenko stated in Hanoi that ZarubezhNeft was pulling out of the $ 1.3 bn VietRoss joint venture. On December 31, Vietnam reimbursed Russia the $ 235 mm it had put into the VietRoss venture.
In the meantime, the 50 % stake in VSP is Russia's most profitable state-owned asset. Russia earned some $ 400 mm of profit from VietsovPetro in 2002. In October, Russian officials announced that VSP's proven oil reserves had been raised to 493 mm tons from the earlier figure of 430 mm tons. They also pledged to sustain VSP's annual output at more than 13 mm tons until 2006.

Subsequently, in the wake of the recent mega-merger between Russia's Yukos and Sibneft oil firms, the new YukosSibneft company, now the world's third largest oil producer, has been seen as the most likely candidate to privatise Russia's remaining oil state-controlled assets, ZarubezhNeft and Rosneft.
However, Russia's emerging oil giant may not be too tempted. ZarubezhNeft is only VietsovPetro’s operator, not owner. And without lucrative Iraqi projects, ZarubezhNeft might be viewed as not exactly attractive. The total value of the assets owned by ZarubezhNeft was estimated at $ 4.6 mm in 2002.

ZarubezhNeft has been working in Iraq since the late 1960s and helped launch Iraq's Rumaila field. However, ZarubezhNeft CEO Nikolai Tokarev has conceded that his firm had little chance of keeping its earlier deals in post-Saddam Hussein Iraq. ZarubezhNeft had hoped to develop Iraq's giant West Qurna field together with Russian oil giant LUKoil.
Yet unlike LUKoil, ZarubezhNeft is yet to indicate any intention to challenge in international courts the imminent loss of the West Qurna project, as well as some $ 200 mm lost in other contracts due to the US-led war.