Russia's Rosneft confirms intention buy 49% stake in Essar Oil

Russian state-owned oil major Rosneft has confirmed its intention to buy 49 per cent equity of Shashi-Ravi Ruia-owned Essar Oil. According to a press statement on the Rosneft website, the Russian company will also start deliveries of crude oil to Essar later this year. The deal is subject to regulatory approvals in India.

The deal is reportedly valued at being about $2.4 billion, though neither company has confirmed this. Essar Oil runs the high-complexity Vadinar refinery at Gujarat, which can process 20 million tonnes of crude oil a year. In the December 2015 quarter, the company reported its highest ever gross refining margin (the difference between the cost of crude oil and the price of refined products) of $13.25 a barrel, also the highest by a refiner in the country in the three-month period. OAO Rosneft is the top-listed crude oil producer globally.

The statement by Rosneft said, “Preliminary mutual understanding has been achieved on the timing and structure of a deal to buy into the equity of Essar Oil Limited. The parties intend to sign and close the transaction by the end of June 2016 upon obtaining all necessary permits. In addition an agreement on crude oil deliveries to commence this year has also been achieved.”

The preliminary agreement for the deal also said that Rosneft would supply 100 million tonnes of oil to Essar Oil for the next 10 years, in addition to boosting Essar’s refinery output from 20 million tonnes a year to 45 million tonnes by 2020. Essar Oil retail outlets might also go up after the partnership, from 2,000 stations now to 5,000 in the next couple of years. The Rosneft statement said that the “deregulation of pricing at the Indian retail market opens perspective of retail sales growth.”

A statement from Prashant Ruia, Director, Essar, confirmed the news. The deal between Essar Oil and Rosneft, which was first reported in early 2015, was delayed by extensive due diligence by the Russian company, sources in Essar Oil have previously told BusinessLine, when Essar was still a publicly traded company. It voluntarily delisted from the stock exchanges in December 2015.

The Rosneft statement added: “The (Vadinar) refinery is the second largest in India and one of a top ten world’s best refineries. The refinery is highly flexible in terms of raw materials use and is capable of refining heavy and sour oil grades. Essar Oil Limited plans to implement the modernisation programme expanding the refinery’s capacity up to 25 million tonnes per annum including production of 1 million tonnes per annum of propylene/polypropylene.”

Igor Sechin, CEO, Rosneft is in New Delhi this week to sign a series of documents on selling stakes in its producing oil fields to Indian companies, including allowing Indian state-owned ONGC to increase its stake in Rosneft's Vankor project in Siberia to 26 per cent while Oil India, Indian Oil and Bharat Petroresources will buy up to 23.9 percent between them in the same field.

Rosneft is using these deals to retire debts incurred in its $55-billion acquisition of TNK-BP in 2013. Its part acquisition of Essar Oil helps the latter similarly, which has debt of well over $3 billion on its books.

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