OVL may hold Russia assets via new arm in GIFT City

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State-run ONGC Videsh Ltd (OVL) may incorporate a subsidiary in the GIFT International Financial Services Centre in Gujarat soon to hold its Russian oil assets.

The move follows the inability of OVL’s Singapore holding arm to receive dividends from the oil assets due to the sanctions on Russia. Including Russia, OVL owns Participating Interests in 32 oil and gas assets in 15 countries.

The outbreak of the Russia-Ukraine war last year created a fresh round of headwinds for OVL, which a section of the government feels has not been able to reap the benefits of its substantial holdings in oil assets overseas.

With Russia nationalising oil output from the Sakhalin-I oil field after the Ukraine war, OVL is just a dividend-receiving shareholder compared to the earlier practice of getting a share in oil output equivalent to its shareholding (equity oil), an official said. Even then, it would receive fresh dividends only after meeting some conditions.

Around $100 million in dividends from the previous year are held up in Russia as Singapore did not permit the remittance of the money to OVL’s Singapore firm, which holds the Russian assets.

OVL set up the Singapore arm due to tax arbitrage as taxes are high in India (15-30% plus cess and surcharge depending on equity holding in overseas company). In Singapore, the tax on dividend income could be zero.

Meanwhile, Reuters reported on Thursday that ONGC hopes to recover over $500 million in dividends pending since 2014 for its stake in Venezuelan projects held through OVL as sanctions on the nation were eased. The Biden administration on Wednesday eased sanctions on Venezuela’s oil sector after the government and opposition parties reached a deal for the 2024 election, in the most extensive rollback of Trump-era restrictions on Caracas.

With GIFT IFSC, India’s answer to global financial centres such as Singapore, officials said OVL is looking at setting up a company in the IFSC to manage overseas assets, especially Russian assets. GIFT IFC, which is treated as a foreign jurisdiction for taxation purposes, offers a host of direct and indirect tax incentives to companies set up there, an official said.

Sakhalin-I, OVL acquired 20% stake in the project in July 2001. Other partners were operator Exxon Nefteggas Limited (ENL) with 30% stake, SODECO, a consortium of Japanese companies 30% and Subsidiaries of Rosneft, the Russian National Oil Company 20%. Sakhalin-1 started 2022-23 by producing about 2,10,000 BOPD in accordance with the planned production profile. However, following the Russia-Ukraine conflict, Operator ENL started significant production curtailment and declared Force Majeure on April 21, 2022. Production became close to zero in September 2022. Russia issued a Presidential Decree on October 07, 2022 transferring all rights & obligations of Sakhalin-1 Consortium to a newly formed entity; Sakhalin-1 Limited Liability Company (Sakhalin-LLC).