By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She is currently writing a book about textile artisans.
This week brought yet another key development in India’s pursuit of its national interest in the emerging multipolar world. Russia is nationalizing the interests of U.S. and Japanese shareholders in its Sakhalin-1 oil project, but making an exception to allow India’s OVL to maintain its stake and continue with further work. In addition, there’s speculation that other Indian companies may be invited in to replace the departing U.S. and Japanese concerns.
As The Economic Times – India’s pink paper – reported yesterday in India explores to expand footprints in oil fields in far East Russia:
[Oil and Natural Gas Corporation (ONGC)] is deploying additional manpower to play a bigger role in operating the Sakhalin-1 oil field following ExxonMobil’s withdrawal, according to news reports.
According to reports, ONGC’s overseas investment arm OVL has offered to send more personnel with suitable expertise to partially fill the void, after US energy giant ExxonMobil announced in March its intention to exit oil and gas operations in Russia due to Western sanctions.
ONGC also expressed hopes that its stake in the Russian project will not be affected in case of the possible re-organization of Sakhalin-1 by Moscow, just as had happened with the neighboring Sakhalin-2 project.
Thus, as the heat and hot water get switched off out across Europe and gas prices climb upward just in time for November’s mid-terms, Indian companies are poised to benefit further from the cackhanded sanctions policy of the U.S.-led alliance. The West is facing the prospect of shuttering businesses while meanwhile Indian companies are jumping in – supported by the Modi government – to take advantage of new opportunities now opening up.
Yves has written extensively about the U.S. alliance’ own goal sanctions policies so I’ll not cover any of that same ground here, but instead refer you to her posts (see, e.g., The Coming Sanctions-Induced Economic Tsunami?)
Instead, in this post, I’ll hew closely to M.K. Bhadrakumar’s first-rate analysis in his Indian Punchline blog of the latest Sakhalin-1 developments. There’s no one better writing about Indian foreign policy at the moment – especially as Dr. S. Jaishankar is now India’s external affairs and restricted in what he can say.
Yet as I wrote in India: Pursuing its National Interest in the Multipolar World in April, Jaishankar broadly outlined in a 2020 book, The India Way, the foreign policy strategy of multi-alignment to pursue in a multipolar world that India is now pursuing. Details of the latest policy shift and modify in response to changing world conditions. But the broader shape of India’s foreign policy was in place well before Russia’s February invasion of Ukraine..
I’ve found Bhadrakumar’s blog posts to be must-reads. His deep diplomatic experience is apparent in each of his posts. From his About Me section:
Roughly half of the 3 decades of my diplomatic career was devoted to assignments on the territories of the former Soviet Union and to Pakistan, Iran and Afghanistan. Other overseas postings included South Korea, Sri Lanka, Germany, and Turkey. I write mainly on Indian foreign policy and the affairs of the Middle East, Eurasia, Central Asia, South Asia and the Asia-Pacific.
Let me turn now to Bhadrakumar’s Sunday post, India to boost Sakhalin-1 oil output.
After Sakhalin-2, Moscow also plans to nationalise Sakhalin-1 oil and gas development project by ousting US and Japanese shareholders. But Moscow will make an exception for India so that OVL which holds 20% stake will remain & continue to work. Moscow grapevine is that while Rosneft will continue to hold controlling share, more Indian companies may be inducted to replace US & Japan and thereby also ensure a sales market in India.
The Sakhalin-1 is located off the coast of Sakhalin Island in the Russian Far East. It comprises three offshore fields — namely, Chayvo, Odoptu, and Arkutun-Dagi. Until recently, the Sakhalin-1 project was operated by a Russian subsidiary of the American major ExxonMobil known as Exxon Neftegaz, which owns 30% of the shares. In addition, 20% is owned by the Russian state, 30% by the Japanese company Sodeco, and 20% by the Indian ONGC Videsh. Whereas Sakhalin-2 specialises in the export of liquefied natural gas, Sakhalin-1 is in the export of Sokol oil.
The capacity of Sakhalin -1 is vast – even though at present, production is only at fraction of what’s possible, due to the abrupt departure of the Americans. But they’ll soon be replaced and Indian company ONGC Videsh is central to that further vision. According to Bhadrakumar:
The capacity of Sakhalin-1 is quite impressive. There was a time before OPEC+ set limits on production level, when Russia extracted as much as 400,000 barrels per day, but the recent production level has been about 220,000 barrels per day. The abrupt departure of the Americans following the US sanctions against Russia has caused theproduction to plummet to just 10,000 barrels. Russians hope that with the replacement by more Indian companies, the production level can be restored to the previous level. Indeed, the hope is that Indian ONGC Videsh will pull up the production level of Sakhalin-1 project relatively quickly by bringing in own technologies.
The overall trend of nationalising the holdings of American, British, Japanese and European capital in Russia’s strategic sectors of economy is crystallising as the new policy — the Russian version of India’s AatmaNirbhar Bharat (“Self-reliant India” campaign.) The cleansing of Russian economy, freed of Western capital, is expected to accelerate in the period ahead. India has seamless opportunities here to make investments and reap windfall profits. In strategic terms, India’s energy security will also be guaranteed for decades to come. [Jerri-Lynn here: my emphasis]
The Sakhalin-1 operation is only one example, from the oil and gas sector, in which Indian firms are reaping the benefits of ignoring the West’s economic sanctions. Per this June FT account, Ambani’s Reliance among Indian refiners targeting diesel exports using cheap Russian crude:
Indian refiners including Mukesh Ambani’s Reliance Industries are using cheap Russian crude to try to boost diesel exports, including to destinations such as the EU with sanctions on Russian oil.
Russia in May replaced Saudi Arabia as India’s second-largest supplier of oil behind Iraq. Russian crude exports to India are expected to increase to over 1mn barrels a day in June, according to commodities data and analytics firm Kpler.
The shift means that Indian refiners could effectively replace some of the diesel Europe once bought direct from Russia or from refining Russian crude.
They are earning outsized profits both from the discount on Russian oil, which is more than $25 a barrel for the main Urals grade, and from sky-high margins on diesel in Europe created by the sanctions on Russian supplies. [Jerri-Lynn here: my emphasis.]
The Ambani’s are India’s richest family and didn’t get to their place at the top of India’s economic heap by being timid in their business dealings. Mukesh Ambani is the world’s ninth richest man and India’s richest; he and his family live in their own ostentatious skyscraper in Mumbai (Bombay). (See this article in Business Insider, An Indian businessman just became the first Asian member of the world’s 10 richest people. Meet the Ambanis, who live in a $1 billion skyscraper and mingle with royals and Bollywood stars)
I’ve ridden past their 40-story home, Antalia, in the back of a taxi. It cost between one and two billion dollars to build and contains six floors of parking for 168 cars and three helipads – no Ambani nor any guest has to queue up for a slot – and huge outdoor hanging gardens (See this Firstpost article, Helipads to ballrooms: All that you wanted to know about Mukesh Ambani’s Antilia, for further details about this conspicuous consumption, Indian-style..
Mukesh Ambani is also a prime BJP supporter, so you can be sure that what Reliance is doing with respect to Russian oil aligns with Modi government policy.
The key question: how long can Reliance and other Indian companies continue to profit from their Russian business dealings before the sanctioning countries take steps to make India stop? Per the FT:
“If western governments see that a third of India’s crude slate is Russian, they can make a broad assumption that some of the diesel coming to Europe contains Russian molecules,” said Neil Crosby, an analyst at data company OilX.
Crosby said this could complicate what is otherwise a very profitable moment for Indian refiners, as Washington puts pressure on New Delhi to restrain Russian oil purchases.
Crosby said: “Will they run into some kind of political wall where it becomes too conspicuous and cut this type of activity?”
Indian executives argue that they are responding to strong international demand for diesel and other products during an energy crunch.
Washington, Brussels, and London have already attempted to pressure India to see things their way, sending various ministers, diplomats, and other personnel to hector, threaten, or cajole. India’s response: to emphasize that the Western way isn’t India’s, and that the Modi government has no intention of kowtowing to anyone. Jaishankar is a forceful and eloquent spokesperson for his country’s multi-alignment policy. (For more background and context, in addition to my post I cited above, see India: Pursuing its National Interest in the Multipolar World, see External Affairs Minister Jaishankar: India Has Concerns About U.S. Human Rights Record, Jaishankar Calls Out Europe’s Selective Concern on Rules-Based Order, Pursuing India’s Multi-Aligned Foreign Policy in a Multipolar World: Time for a Sister Souljah Moment?
India’s policy isn’t going to change any time soon, particularly as most of the global South agrees with India and the failure of the sanctions policy becomes even more apparent. Not to mention the considerable profits to be made by continuing to trade with Russia, which in addition to the fossil fuels and raw materials it exports, is also the world’s largest source for fertilizers and their components, as well as a leading grain producer.
Meanwhile, demand for Indian fuel products is high, with Reliance the key player. Per the FT.
Ajay Sahai, chief executive at the Federation of Indian Export Organisations, said that “there have been a lot of inquiries that have flowed to India, particularly for import of diesels from India. Those came from European countries.”
Reliance is responsible for “95 per cent plus” of India’s refined oil product exports to Europe, said Janiv Shah, downstream analyst at Rystad Energy. With Europe’s diesel shortage “here to stay” Reliance is “currently one of a shortlist” of potential refiners that could fill the vacuum left by Russia, said Shah.
Once the oil is processed, it’s difficult – if not impossible – to distinguish what came from where. And Reliance enjoys especial advantages. According to the FT:
“Once the barrels come into the refining system and are processed, there is every type of grade from every different country in the world, so it is very hard to distinguish that this one molecule of diesel came from ‘this’ source in ‘this’ country,” said Shah. “It’s basically impossible to distinguish.”
Reliance’s refinery, which can process 1.24mn barrels of crude per day, is positioned well to profit from Russian crude, said Harshavardhan Dole, an analyst at brokerage IIFL whose coverage includes Reliance.
“Reliance is actually in the sweetest of the sweet spots because the complexity of RIL’s refinery is actually one of the highest,” said Dole. [Jerri-Lynn here: my emphasis.]
I’m so pleased to hear this. I mean, think of the maintenance and the upkeep costs on Antalia alone. As long as India maintains its current independent foreign policy – including trade with Russia – Reliance will prosper – and the Ambani’s need not worry about whether they have to rent out any spare parking spots.
Putin takes Russia’s Revenge for the Worst of Yeltsin-Enabled Grifting
Let’s turn away from lifestyles of the rich and famous back to Indian Punchline. Bhadrakumar is much more measured in his language, than I. Permit me to summarize the gist of the following passage in tabloid terms: the West’s self-inflicted sanctions wounds allow Russia to take revenge and recoup some of what Western grifters have spirited out of the country since the Yeltsin period. Per Indian Punchline;
Moscow was well aware of the predatory character of Western capital in Russia’s oil sector — a legacy of the Boris Yeltsin era — but had to live with the exploitation as it didn’t want to antagonise other potential western investors. But that is history now. The souring of relations with the West to almost breaking point rids Moscow of such archaic inhibitions.
Indeed, the new policy to replace western capital from the commanding heights of Russian economy is not without risks, but Moscow is confident that it is on the right track and must do what it takes. Also, the decrease in production in the Sakhalin-1, unless addressed soon, may negatively affect the very characteristics of the oil fields in the Russian Far East, if the oil recovery factor decreases over time and a lot of oil is left to remain in the reservoirs.
There’s another possible opportunity for agile Indian firms. Now that Russia no longer has easy access to Western technology, it will be forced to develop more of its own, and Indian companies can also position themselves to insert themselves into these projects. According to Indian Punchline:
The development of the fields had depended on Western equipment and technologies. Now Russia has lost both. On the other hand, the departure of the Americans will leave Russia with no easy route but to have its own technologies.
At one level, the sanctions might appear to represent a crisis for Russia – although in reality, it’s the West that has suffered more from them, relatively speaking. And returning to Bhadrakumar’s earlier point, sanctions also provide Putin the opportunity to redress long-simmering past grievances – to hit the reset button, so to speak:
On balance, however, Americans stand to lose heavily too, as the production sharing arrangements dating back to the Yeltsin era had been forced out of Russian government when it was in dire economic straits during the transition from the Soviet period and was in no position to negotiate optimal deals. Come to think of it, something like 262 such so-called production sharing agreements (PSAs) were squeezed out of the Russian government by western oil companies by the time Yeltsin retired.
After coming to power in 1999, President Vladimir Putin set about the mammoth task of cleaning up the Aegean stables of Russia’s foreign collaboration in the oil sector. The “decolonisation” process was excruciatingly difficult, but Putin pulled it through and got rid of as many as 260 (out of 262) PSAs. In fact, Sakhalin-1 and Sakhalin-2 are the very last remaining two PSAs harking back to post-Soviet Russia’s decade of humiliation under Yeltsin.
Any surprises why the Biden Administration hates Putin so much and wants him out of power in Moscow? [Jerri-Lynn here: My emphasis.]
India lived through centuries of colonial domination. So unsurprisingly, its leaders well understand what it means to dance to another’s tune and the relief one feels when that’s no longer necessary. There’s a long history of symbiosis between Russia needs and those of India. By taking advantage of the considerable opportunities in the oil and gas sector, at a time when Western firms are hamstrung by sanctions policy, Indian firms have opportunity to earn tremendous profits. These opportunities aren’t limited to Russia’s oil and gas alone, but extend to high-tech sectors, as Russia seeks other sources of supply or partnership not constrained by sanctions. Per Indian Punchline:
Legend is that when the Soviet Communist Party Secretary Nikita Khrushchev paid his pathbreaking visit to India in 1955, then Prime Minister Nehru, amongst other “talking points”, referred to Soviet Union’s great reservoir of expertise in the oil sector, while complaining that the West refused help for anything in India’s state sector.
The folklore is that Khrushchev instinctively reacted in positive terms to Nehru’s request for help and no sooner than his return to Moscow, deputed a famous Soviet expert / geologist to India to prospect for oil — whose fame was such that he could apparently smell oil lying untapped deep in the bowels of the earth! Thus was born the ONGC in 1956, which is now heading for Sakhalin Island on a similar mission!
We live in interesting times, with the consequences of sanctions providing opportunity for some to earn or increase vast fortunes.
By contrast, for many ordinary Europeans and Americans, prospects are bleak, with sanctions leaving people cold and hungry, and causing businesses to fail, taking with them the livelihoods of many.