Spain’s Repsol is looking to team up with Russia’s Gazprom Neft in order to develop its upstream business in the Urals region.

A spokesman for Russia’s Federal Antimonopoly Service (FAS) told Reuters on June 7 that the government body had received an application from Gazprom Neft to buy a 25% stake in Eurotek-Yugra, a wholly owned subsidiary of Repsol. The enterprise has subsoil rights to seven blocks in Khanty-Mansiysk Autonomous Okrug, including Karabashny-1 and -2, which comprise the Ourinskoye oilfield.

Ourinskoye was discovered in 2014 and is estimated to contain 32 million tonnes (235 million barrels) of oil in C1+C2 reserves. At the time, Russian Energy Minister Alexander Novak claimed it was the largest discovery to be made in Russian in two years.

Gazprom Neft’s deputy director-general, Vadim Yakovlev, confirmed to Russia’s RBC on June 9 that the company had applied to buy the stake, adding that the two companies hoped to close a sales and purchase agreement within two or three months. He also noted that the pair had agreed an option for Gazprom Neft to raise its share in the enterprise further in the future.

Repsol has not commented on the matter.

The Spanish major operates 32 licences in Russia’s Volga-Urals and Western Siberian basins, although its production portfolio is limited to a handful of small fields, which together yielded around 11,000 bpd of oil and under 400 mcm of natural gas last year. It marked its foray into Russia with the purchase of a 10% stake in Western Siberian Resources (WSR) in early 2006 for US$88 million.

WSR later merged with Alliance Oil Co. (AOC), providing Repsol with a 3.5% stake in the newly formed company. In 2011, Repsol bought 74.9% of Eurotek-Yugra, raising its stake to 100% later that year with the acquisition of parent company Eurotek for US$230 million.

Repsol then entered into an agreement with AOC to form a new upstream joint venture, Alliance Repsol Oil & Gas (AROG). Under the deal, Repsol agreed to transfer Eurotek to the joint venture, while AOC handed over its Saneco and Tatnefteotdacha subsidiaries. AOC was snapped up by Russia’s Independent Petroleum Co. (NNK) in 2014.
Deal rationale
The partnership will provide clear benefits to both companies.
Repsol has been reluctant to invest in Russia during the oil market downturn, with the country accounting for just 3% of its exploration expenditure last year. Since 2014, the Spanish major has only drilled three wells in Russia, all of them at the Ourinskoye field. Divesting a stake in Eurotek-Yugra will help fund and de-risk development of the field, while also allowing Repsol to pursue further exploration work at the enterprise’s other blocks.

“The partnership will be a trigger for [Repsol’s] upstream development in Russia,” Andrey Polishchuk, an analyst at Raiffeisonbank, told NewsBase Intelligence (NBI) on the phone this week, adding that Gazprom Neft was likely to bolster its stake in the venture to 50% in the future. “This is probably just the start; [Gazprom Neft] may try to find something else with Repsol in the Urals or somewhere else,” he said.

Partnering with a state-owned company like Gazprom Neft, Polishchuk said, was more advantageous to Repsol than strengthening its existing ties with NNK, as the former enjoys government support and finds it easier to secure new licences.

NNK, owned by former Rosneft president Eduard Khudainatov, was recently put under US sanctions because of its alleged sale of petroleum products to North Korea. This puts company’s partnership with Repsol at risk, as it will find it harder to fund investment commitments.

“It will be much harder for the company to find financing, and the costs will be higher,” Polishchuk noted.

Meanwhile, a stake in Eurotek-Yugra will help Gazprom Neft expand its foothold in Khanty-Mansiysk, a region dominated by rival producers Rosneft and LUKOIL. For now, the Russian major is pursuing smaller-scale acquisitions, as its free cash flow is limited.

“The company is investing too much, as they have a pretty large greenfield portfolio, so most of their spending goes towards these projects,” Polishchuk said.

Polishchuk estimated that the Ourinskoye field was worth US$200-250 million, based on current resource estimates. The deposit is situated at the outer rim of the known Western Siberian Basin, just 30 km away from other producing assets.