The past four years have been a 21st century low point for Western foreign investment in Russia, with sanctions, unlawful trade practices and ceaseless wars in the Greater Middle East antagonizing the sides even further. Against such a difficult background when virtually no Western major brave enough to enter the Russian market (and most American firms rolling back projects) it is doubly notable what Schlumberger is doing. In fact, Schlumberger seems to be, one might say finally, on the brink of concluding a milestone Russia deal, which would greatly fortify its standing as the world’s leading oil services company. By buying into Russia’s largest onshore drilling firm Eurasia Drilling Company (EDC), it could secure access to a massive market irrespective of political tensions. Well, almost irrespective.
The news that Schlumberger is allegedly keen on acquiring EDC first emerged in early 2015. Even then, several months after the introduction of a US-EU ban on any Western participation in Arctic, deep-water or shale projects, it raised eyebrows as an excessively ambitious undertaking. Schlumberger initially wanted to gain immediate and full control over EDC’s equity, then agreed to a first-round buy-out of 51% and in the end somewhat grudgingly acquiesced to offer $1.7 billion for 46% (because Russian authorities were concerned about the potential loss of an influential element of the nation’s oil sector) to be followed by a second-round acquisition three years later of the remaining 54%. Confronted with massive bureaucratic pushback, Schlumberger renounced on the idea, pledging to look for M&A possibilities elsewhere… only to come around with a new offer two years later.
The fact that it is Schlumberger, not some other service major, that is buying Russia’s leading oil services company is by no means accidental. The co-owner of EDC, Alexander Dzhaparidze (neither he, nor the other owner Alexandr Putilov are under sanctions) has sold his first oil services-related company, the Iraq-focused Petroalliance, to Schlumberger in 2003. Partially on the money generated by the sale, Dzhaparidze bought drilling assets then-owned by the private major LUKOIL, thus kick-starting the development of EDC. Since then, EDC and Schlumberger have forged a sort of a strategic alliance in 2011, with several cross-acquisition of each other’s Russian assets in the years leading up to the acquisition negotiations. Related: Here’s What’s Next For Russian LNG
Since 2015, however, a whole slew of things has changed. The United States have levied their umpteenth round of sanctions against Russia and very few are those who still believe that bilateral relations can be mended anytime soon. Illustrating the depth of the schism, the Russian government is openly saying that the populace should brace itself for years, if not decades of US-led sanctions. Eurasia Drilling has changed, too, following the failure of the first Schlumberger bid – in late 2015 the top management effectuated a take-private deal and shortly after going private EDC has delisted its shares from the London Stock Exchange. Against the background of rising oil prices, a genuine feeling of cautious optimism in the global markets and (even) Russia’s GDP bouncing back into growth in 2017, Schlumberger launched another bid in July 2017.
Whilst the oil market managed to test the bottom and rebound back into almost universally palatable levels within less than three years, there has been little change in the stance of Russia’s Federal Antimonopoly Office (FAS) – it is comfortable with Schlumberger taking anything within the 25%+1 share – 49% interval. FAS authorities even recommended Schlumberger to launch a joint bid with Russia’s Direct Investment Fund or a UAE fund. This is a highly unlikely scenario, as letting in the Russian government would definitely not serve EDC’s aim to derisk its activities. Especially so as a powerful state-owned company, the oil giant Rosneft, seemed very eager to immerse EDC in the past. Despite Rosneft’s statements to the contrary, there is no guarantee that it will not give it another go once its debt burden eases. Related: Why Peak Oil Demand Doesn’t Matter
All in all, EDC is interested in Schlumberger as a buyer, Schlumberger is interested in EDC to provide a big boost to its Russia presence (statistics differ on EDC’s market share, however, generally it is located within the 20%-30% interval). Against such a constellation, a deal of some sorts ought to emerge at one point and despite sporadic antics from Russian authorities there have been encouraging signs in the past few weeks, pointing towards such a mutually acceptable solution. Odd as it may seem, the latest presumed deal setup reflects the geopolitical conditions between Russia and the United States. As it stands, the Russian government is conditioning the deal with Schlumberger on the US firm granting its rights on a part of its technologies to a Russian entity in case it decides to leave the country spurred by further US sanctions.
It should be noted that the list of specific technologies to be retained is still a matter of negotiations, so there is still work to be done on the EDC saga. Schlumberger also agreed to relocate EDC, which is currently a Cayman Islands-based company, to Russia, also preliminarily agreeing to the state’s local content requirements with regard to EDC’s equipment and component procurement. Schlumberger’s readiness to accept the sanctions clause might be the missing piece to the puzzle. If the deal goes forward for once (a separate US Treasury approval is also required), it will be the biggest Russian oil investment in the sanctions’ era, a timely and poignant reminder that sometimes the oil community is better off without politicization.
By Viktor Katona for Oilprice.com
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