*How Russia’s LUKOIL Sealed Investment Deals In Nigeria, Cameron, Senegal, Others
By Viktor Katona
Times are tough for Russian oil companies. In the post-Crimean era where sanctions have become the new normal, oil prices above 40-45 per barrel have guaranteed a sustainable future for almost all of them, however when prices plunged below the breakeven level in March-April things have suddenly turned sour (and refining margins turned negative).
It seems that the misery will not last very long as Q2 2020 results have already propelled most oil firms to a light profit or a step away from breaking even – rekindling the main question that troubles Russian companies in the past 2-3 years, namely where to invest to maintain their standing. A recent story in offshore Senegal, albeit unsuccessful in the end, might point to the main conclusions Russia’s firms have drawn from that. In late July 2020, Russian private producer LUKOIL announced that it would buy Cairn Energy’s 40-percent stake in the RSSD Block (Rufisque, Sangomar, Sangomar Deep) offshore Senegal.
That African countries would turn towards Russia should not come as a surprise, previous investments from Western majors have waned in the past couple of years and disillusionment with the difficult conditions of Chinese investments continues to increase. That Russian companies would be interested in Africa’s oil and gas is even more understandable – with US sanctions remaining in force and upstream availability for most of Asia/Middle East shrinking as we speak, Africa remains one of the last regions on earth where national oil companies would not be able to develop their resources alone.
There is certainly a rationale for LUKOIL to become the Russian pioneer in Africa as almost all major projects that are still up for grabs in Russia are pre-allocated for state firms, therefore if Russia’s top private producer wants to survive in the long-term it needs to invest abroad. LUKOIL has been active in Africa since 1995 – its first project was centered around the Egyptian shallow waters in cooperation with the Italian major ENI.
From there onwards most of the company’s investments went into West Africa, encompassing Ghana, Nigeria, Cote d’Ivoire, Cameroon, Sierra Leone and others. The West African engagement is still far from over – having bought ENI’s stake in the Congolese offshore block Marine XII last year, the Russian firm has identified West Africa as one of its top strategic regions (along with deepwater Mexico).
The whole setup seemed to move into the suggested direction when Russia’s largest private oil producer LUKOIL struck a deal with the Scottish upstream company Cairn Energy to purchase its 40-percent stake in the Sangomar Block, offshore Senegal. Under the agreed arrangement, LUKOIL would pay $300 million, with another potential bonus payment of $100 million once production starts and would cover all costs incurred since January 01, 2020. The deal came with several provisos which seemed like a formality (such as the Senegalese government’s approval of the transaction), however things have started to take an unexpected twist when the block’s operator, the Australia-based Woodside Petroleum announced its intent to pre-empt LUKOIL’s entry into the project.
The RSSD Block (Rufisque, Sangomar, Sangomar Deep) is one of the largest offshore discoveries of the past decade. The initial find took place in November 2014, unearthing a net oil pay of some 90 meters in Albian sandstones. The SNE-1 exploration well was drilled in a water depth of 1100 meters, to a total depth of more than 3000 meters. Just when the Sangomar field was about to start its tree assembly works, the COVID-induced market slump has resulted in further delays to the initial project setup. With an assumed drilling campaign of 23 development wells, Sangomar would now most probably get to first oil in late 2022/early 2023. The Phase 1 production plateau is expected to reach 100kbpd.
Less than a month following LUKOIL’s announcement, Woodside Petroleum, the operator of the block, has opted to use its pre-emption right and pay the same $400 million that the Russian company vowed to pay. Woodside claimed that the potentially 100kbpd producing asset is a well understood investment and as such it would prefer to keep it insulated from any sort of US sanctions risk. Despite LUKOIL being heretofore unsanctioned due to its private nature, the prospect of it being sanctioned cannot be fully ruled out. All in all, Woodside’s stake would increase from its initial level of 31.89% to 68.33%, with Petrosen owning 18% and FAR having 13.67%.
Hypothetically, there are multiple variants for LUKOIL to stay in the Senegal offshore game. First of all, media reports indicate that FAR, an Australia-based upstream company that currently holds 13.67% of the RSSD Block, is still considering to sell its stake in the project, either partially or fully. As a consequence, LUKOIL might still buy its way into the project, Woodside’s reluctance notwithstanding. Secondly, Russian companies might also start bidding for open Senegalese offshore blocks, specifically the 3 available acreages – Rufisque Offshore II, Sangomar Offshore II and Sangomar Offshore Deep II – which encompass the RSSD block. Senegal’s national oil company Petrosen has just launched another round of promotion for all the open blocks (9) that are still on the table.
*This article culled from Oilprice.com was originally written by Viktor Katona for Oilprice.com