Saudi Aramco to acquire share in Novomet, a leading Russian artificial lift equipment manufacturer

Saudi Energy Minister Khalid Al-Falih has announced that Saudi Aramco, a Saudi state-run oil company, may close the deal of purchasing a share in Novomet, a Russian artificial lift equipment manufacturer, in February 2019. In December 2018 Kirill Dmitriev, the CEO of the Russian Direct Investment Fund (RDIF), said that Saudi Aramco and Novomet had “finalised the parameters of the deal”, which would see Saudi investments in one of the leading Russian oilfield services (OFS) equipment providers, reports Prime news agency. Saudi Aramco also plans to purchase pumping systems produced by Novomet.

“We have finalised the main parameters of the Novomet deal to supply Russian-made pumping equipment to Saudi Aramco and other companies, and Saudi Aramco will become an investor in this project,” said Mr Dmitriev.

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Image credit: Novomet

In June 2018 the CEO of Novomet-Perm Maxim Perelman said that RDIF, Public Investment Fund (PIF) of Saudi Arabia and Saudi Aramco plan to acquire 30.76% share, which is currently controlled by the Russian state-run investment fund Rosnano. According to Mr Perelman, the investors expressed their interest in “developing the asset further”, and the deal was expected to be closed by the end of 2018, reported “Kommersant” business newspaper.

Rosnano has been looking for a buyer of its share in Novomet since June 2016. In January 2017 Halliburton, an American oil service company, applied for the Russian Federal Antimonopoly Service’s (FAS) permission to acquire 100% stake in Novomet. However, one year later it was announced that a $1 billion worth deal had been cancelled. The reason for the cancellation was never disclosed but it was most likely caused by the position of the Russian government, which was resistant to the idea of selling such an important asset to an American company because of the technological sanctions imposed by the U.S. on the Russian oil and gas sector. The Russian oil industry is currently struggling to increase output from mature oil fields in Volga region and Western Siberia; from this perspective, a successful national artificial lift equipment provider could be considered a strategic asset by the government.

Established in 1991, Novomet is the leading Russian manufacturer of artificial lift equipment, first of all, ESP systems. Its product line includes pumps, motors, protectors, VSDs (variable speed drives), and sensors, as well as a great number of custom-made auxiliaries for specific and complex wells. According to Rosnano, in 2016 Novomet’s market share in the artificial lift equipment market was 20% (2nd) in Russia and 2.3% (7th) worldwide. Around 60% of Novomet is controlled by the company’s senior management team, 30.76% belongs to Rosnano, and minor shares are controlled by the Russian investment and private equity funds Baring Vostok and Russia Partners.

During his visit to Riyadh on 16 January 2019 Kirill Dmitriev announced that Russia and Saudi Arabia had been working on several joint projects in the oil and gas, oilfield services and petrochemical sectors, including joint development and manufacturing of equipment for the oil and gas industry. The number of joint investment projects between Russia and Saudi Arabia is expected to increase significantly in 2019, said Mr Dmitriev.

Russian Direct Investment Fund and Public Investment Fund of Saudi Arabia currently manage a $10 billion joint investment fund dedicated to investments in energy-related projects in both Russia and Saudi Arabia. According to the Russian press, apart from Novomet, FDIP and PIF consider purchasing a share in Eurasia Drilling Company (EDC), one of the leading drilling services providers in Russia. Last year Schlumberger, a global oilfield services champion, also expressed interest in this asset. The deal was approved by FAS but has not been closed by this date.

Russian-Saudi alliance in the energy industry may look unlikely since Russia and Saudi Arabia not only remain competitors on the global oil market but also have quite the opposite views on various political issues in the Middle East (for example, the war in Syria, where these countries support the opposite sides of the conflict). However, recently both countries managed to maintain good relations and work together on several energy-related issues. After successful cooperation on the first OPEC+ deal in 2016, which helped to decrease production and thus stabilise plummeting oil prices globally, the countries intensified their cooperation in other aspects of the oil and gas industry, including technology development. Russia and Saudi Arabia have been experiencing similar problems, such as depleting resources and decreasing production on the large and mature oil fields, which helped both countries to establish themselves as global oil production and export champions. Maintaining the status of the world’s leading oil producers requires both countries not only to expand their geological exploration activities, invest in offshore exploration and development of unconventional resources but also actively implement EOR methods to increase production from the mature fields.

The Russian oil sector was negatively affected by the E.U. and U.S. sanctions that considerably limited the country’s access to new technologies on the global OFS market. On the other hand, even remaining one of the key U.S. allies in the Middle East,  Saudi Arabia feels uncomfortable with the current shale oil development in the U.S., seeing new American shale oil industry as a competitor and the U.S. policy to sustain low oil prices as a threat to its prosperity and security as a nation in the long term. For this reason, Russia and Saudi Arabia currently share the same interest in developing their own technologies to reduce heavy dependence on Western oilfield services providers, so their technological alliance does not look unimaginable.

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