US oilfield services giant Schlumberger has launched a second bid for a stake in Russia’s largest drilling company. In a statement on July 20, the company announced it had struck a deal to buy a 51% equity share in privately owned Eurasia Drilling Co. (EDC). The transaction is subject to approval from Russia’s regulatory watchdog, the Federal Anti-Monopoly Service (FAS), Schlumberger said.
“I warmly welcome Schlumberger as our majority shareholder,” EDC CEO Alexander Dzhaparidze said in a separate statement. “It builds on our strategic alliance with Schlumberger since 2011.”
EDC owns a fleet of over 650 rigs and controlled a 16% share of the Russian drilling market in 2016.
This marks the second time that Schlumberger has approached the Russian company with an investment offer. In January 2015, the US firm announced an agreement to buy a 45.65% share in EDC for US$1.7 billion, with an option to raise its equity share to 100% at a later point. However, the deal fell through after the FAS delayed approvals amid concerns that EDC’s operations could be impeded if US sanctions were sharpened.
Dmitry Peskov, the spokesman for Russian President Vladimir Putin, has said that the current deal will require approval not only from the FAS but also from a government commission on foreign investment control. However, the Kremlin’s position on the agreement is unclear.
“If we talk about a global trend, Russia was, is and will be interested in foreign investment and in co-operation with foreign investors in all possible sectors, excluding the areas which are most sensitive,” Peskov was quoted as saying by Reuters in a conference call last week. "But even in these areas co-operation is still possible, and a relevant decision is to be taken in each separate case by the government's commission on foreign investment."
EDC’s main customer is independent oil producer LUKOIL, whose president and largest shareholder, Vagit Alekperov, said he held a 3% stake in EDC in early 2015. According to Russian business paper Kommersant, Alekperov has held talks with the government regarding Schlumberger’s recent bid. The paper cited a source as saying that Alekperov, who has expressed open support for the partnership with Schlumberger before, had stressed to the government the need to protect LUKOIL’s interests in Russia’s oilfield services market. The sector has become increasingly dominated by Rosneft, which purchased Targin, the Bashkortostan-based services arm of AFK Sistema, in late December 2016. In the past, LUKOIL had enlisted Targin to service some of its oilfields in the area. Rosneft’s purchase of Targin came shortly after it closed a deal to buy its biggest customer, Bashneft.
According to the Kommersant source, LUKOIL and Schlumberger believe they have assurances that the Kremlin will greenlight the deal. However, the source said that Rosneft CEO Igor Sechin remained categorically opposed to the investment.
EDC is also looking to farm out some its equity to a consortium of Russian Direct Investment Fund (RDIF), the Russia-China Investment Fund (RCIF) and “leading Middle Eastern co-investors.”
RCIF is itself a joint venture between RDIF and China Investment.
On June 1, EDC said it had agreed on the main terms of a share purchase by the consortium, without specifying how large a share was to be sold. In March, however, Reuters cited a source as saying that Russian and Chinese financiers were teaming up with Mubadala, the UAE’s investment fund, to buy a 13-15% stake in EDC. Abu Dhabi’s involvement was later confirmed by the head of RDIF in early June.
In its statement last week, EDC said that work on this investment was “ongoing” and that a “definitive agreement” was expected in the near future.
Saudi Arabia has also expressed interest in investing in the Russian drilling giant.
Teaming up with Schlumberger and other foreign investors will allow EDC to expand its international customer base. At present, the firm’s operations are confined to Iraq, Turkmenistan and Kazakhstan. The contractor will also gain access to Schlumberger’s technologies and expertise, which could enable it to secure more work in complicated plays in Russia. Meanwhile, the tie-up with Chinese and Middle Eastern financiers will unlock capital that EDC can use to fund business growth.
In return, these foreign investors are looking to gain access to one of the few countries where oil producers have maintained relatively high spending levels despite the oil price crash.
It remains to be seen whether Russian regulators will approve Schlumberger’s latest offer. At present, EDC’s core business is drilling at onshore conventional oilfields, and not the unconventional and deepwater oil and gas projects that have been targeted by Washington’s restrictions on the supply of US equipment and technology. However, Moscow likely fears that the US sanctions regime could be tightened in the future. Only this week, the US House of Representatives voted overwhelmingly in favour of expanding and formalising sanctions against Russia. Among other things, the new law added the Nord Stream 2 gas pipeline to the list of Russian entities targeted by the punitive measures.