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OIL: Head-To-Head
(c) 2003 Asia Times Online Co, Ltd.

Clouds over Russia's Vietnam oil project
By Sergei Blagov

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.

Zarubezhneft, a big player in Vietnam's off-shore oil fields, operates - in a 50-50 partnership with PetroVietnam - the US$1.5 billion Vietsovpetro joint venture, or VSP, which accounts for the bulk of Vietnam's oil exports. In 2002, Vietsovpetro pumped 13.5 million tons of crude, while Vietnam's overall output reached some 17 million tons.

However, 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 issued a statement saying that its current status as a GUP involved "needless bureaucracy and paltry regulations," complained that as a GUP it could not decide on contracts of more than 14,000 rubles ($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.

Zarubezhneft is keen to dismiss the inevitable speculation about its imminent "privatization," stressing that reorganization would not amount to privatization and that the federal government would own 100 percent 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. 

Vietnamese officials apparently do 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 privatization 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, Vietnamese media outlets speculated that Zarubezhneft may withdraw from a venture to exploit the Dai Hung, or Big Bear, oil field. "It is highly probable that the Russian company will pull out," an official who asked not to be named was quoted as saying in the Saigon Times.

"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 million into the oil field to increase output at Dai Hung. However, the Russian company appeared reluctant to go on with the project after drilling exploratory wells in the field, saying that the investment is risky, according to The Saigon Times. However, Zarubezhneft 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 kilometers. In November, VRJ-Petroleum, a joint venture between Zarubezhneft (50 percent), PetroVietnam (35 percent) and Japan's Idemitsu (15 percent), 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 Ltd (BHP) won a bid for Dai Hung and announced that it could yield up to 14 million tons of crude oil a year, or 250,000 barrels a day. However, BHP was initially pumping 25,000 barrels and then output went down. After spending some $250 million, BHP exited Dai Hung in 1997. Malaysia's Petronas 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 tons a year or nearly 50 times less than BHP expected.

Moreover, Zarubezhneft recently withdrew from a major venture, VietRoss, to build Dung Quat, Vietnam's first proposed oil refinery, although remaining a subcontractor in the Dung Quat project for two bidding packages worth some $110 million. This was announced on December 2002, when Russian stated that Zarubezhneft was pulling out of the $1.3 billion VietRoss joint venture. Vietnam reimbursed Russia the $235 million it had put into the VietRoss venture.

In the meantime, the 50 percent stake in VSP is Russia's most profitable state-owned asset. Russia earned some $400 million of profit from Vietsovpetro in 2002. In October, Russian officials announced that VSP's proven oil reserves had been raised to 493 million tons from the earlier figure of 430 million tons. They also pledged to sustain VSP's annual output at more than 13 million tons until 2006.

Subsequently, in the wake of the recent mega-merger, there is open speculation about  the privatization of Russia's remaining oil state-controlled assets, Zarubezhneft and Rosneft.

However, Zarubezhneft is only VSPís 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 million in 2002.

Zarubezhneft had been working in Iraq since the late 1960s and helped launch Iraq's Rumaila field. However, Zarubezhneft conceded that it has little chance of keeping its earlier deals in post-Saddam Hussein Iraq.

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