Upstart Russian oil firm, with Goldman Sachs backing,
bucks industry blues
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[April 16, 2019]
By Olesya Astakhova
YARAKTA OIL FIELD, Russia (Reuters) - In
the frozen taiga of eastern Siberia, where bears roam in spring after
waking from hibernation, an independent Russian oil company is bucking
the domestic industry trend by rapidly ramping up its output and
expanding operations.
Irkutsk Oil Company, known by the Russian acronym INK, has increased its
crude production levels 30-fold over the past decade and has negotiated
access to a pipeline network that allows it reach the Asian market.
The company told Reuters it is planning investments worth $3-$4 billion
over the next three years, including developing its gas business by
building four processing plants.
INK stands out in the Russian oil sector, more than half of which is in
state ownership, and is dominated by massive players like Rosneft and
Lukoil. Production growth in the sector has been sluggish and a
combination of low oil prices and Western sanctions have weighed on new
investment.
There is no immediate prospect of the industry landscape changing,
leaving INK as a throwback to the 1990s, when the state had a smaller
role and enterprising businesses blossomed.
![](http://archives.lincolndailynews.com/2019/Apr/16/images/ads/current/Applegate_exc_sda_daily_030415.png)
However, its experience suggests there are still opportunities in the
sector for smaller, nimbler independent players, backed up by some
international know-how and a dose of good luck.
INK is not subject to the U.S. sectoral sanctions that apply to Russia's
biggest energy firms and which place restrictions on the type of
financing they can attract from Western creditors. INK's minority
shareholders include Goldman Sachs and the European Bank for
Reconstruction and Development (EBRD).
Its crude production was 9 million tonnes last year, or 180,000 barrels
per day (bpd) - small beer compared to the 230 million tonnes, or 4.6
million bpd, produced by Rosneft.
The company faces a series of obstacles that could put the brakes on its
growth, including the increasing risk of being swallowed up by a larger
rival, the need to invest huge amounts of money to build infrastructure
in eastern Siberia and a lack of skilled staff in the remote region.
-58 CELSIUS, SNOW DRIFTS, FLOODS
Producing oil in such a hostile environment is also challenging. Winter
temperatures fall as low as 58 degrees Celsius below zero, and snow
drifts reach 1.5 meters in height, according to INK workers.
![](http://archives.lincolndailynews.com/2019/Apr/16/images/ads/current/LPL_small%201.gif)
When the snow melts in spring, rivers flood, cutting the oil workers off
from the outside world and meaning they have to travel in and out by
helicopter.
To reach reserves in the fledgling oil region, INK has to sink wells up
to 5 km (3 miles) in depth, compared with 1-3 km in western Siberia
which is more developed.
A global deal to curb oil production agreed by OPEC and Russia, which
means INK will have to keep its output at 9 million tonnes until July,
has come at an opportune time for the company, according to Dmitry Zotov,
its head of oil production.
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![](../images/041619pics/busine27.jpg)
An employee demonstrates a sample of crude oil in the Yarakta Oil
Field, owned by Irkutsk Oil Company (INK), in Irkutsk Region, Russia
in this picture illustration taken March 11, 2019. REUTERS/Vasily
Fedosenko/Illustration
![](http://archives.lincolndailynews.com/2019/Apr/16/images/ads/current/atlantabank_lda_SFARM_2019.png)
"The OPEC deal has given us a chance to stop and draw breath," said Zotov,
adding that INK was using the time "to touch up the paint here, do some repairs
there".
To help with exploring in such a difficult environment, INK said it had hired
Don Walcott, an expert in oil production who has previously worked for
Schlumberger and YUKOS, the Russian oil firm taken over by Rosneft.
INK does not have publicly-traded shares so there is no independent estimate of
its value.
The company's estimated value in 2013, when Goldman Sachs acquired its stake of
slightly less than 4 percent, was $2.7 billion, according to a source familiar
with the terms of that deal who declined to be identified as the information is
confidential.
The estimated value of the firm now is at least $4 billion, Yuri Rubin, INK's
chief financial officer, told Reuters. He did not detail how that estimate was
calculated.
Andrei Polishchuk, an analyst with Raiffeisen, said the $4 billion estimated was
plausible. "The company has good production assets and their proximity to ESPO
infers a premium on the company's value compared to competitors," he said.
ESPO is the Eastern Siberia-Pacific Ocean (ESPO) pipeline, which pumps Russian
crude to Asian markets.
![](http://archives.lincolndailynews.com/2019/Apr/16/images/ads/current/brandt_sda_SFARM_color2018.png)
Goldman Sachs did not respond to a request for comment on its investment. The
EBRD, which owns a 1.6 percent stake in INK, said it was satisfied with its
investment and had no plans to increase its holding.
SIBERIAN OIL TO ASIA
The company started out in the oil-producing business in the late 1990s when its
main shareholder, Nikolai Buinov, whose family had run a local fuel transport
business, acquired three oil concessions from the local government. The previous
owners had run into financial difficulties.
At the time, eastern Siberia had no infrastructure and was thousands of
kilometers from markets. Oil majors were preoccupied with easier prospects
elsewhere.
Luck played a part when the first wells found oil of an unusually high quality.
Some of INK's wells have a yellow-reddish color, a sign of low residue levels.
In 2011, INK's fields were connected to the ESPO pipeline, where its crude mixes
with other blends. INK now sells 300,000-400,000 tonnes of oil a month, or
around half of its production, for export. The rest of its production goes to
the local market.
(Editing by Christian Lowe and Pravin Char)
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