The present global scenario marked by low crude oil prices has led major oil and gas producing countries to aggressively scout around for overseas markets. India, with its growing energy needs, has thus ranked high on foreign investors’ list of countries with regard to asset acquisition. The recently an-
nounced Essar-Rosneft deal is testimony to this. In the wake of the drop in crude prices, it has made sense for net oil exporting countries such as Russia to consolidate their hold on growing markets such as Asia, prior to the correction in crude price.
The deal
In October 2016, Essar Energy Holdings Limited and Oil Bidco (Mauritius) Limited – the two controlling shareholders of Essar Oil Limited – entered into separate definitive agreements for offloading a 98 per cent equity stake in Essar Oil. The remaining 2 per cent will be held by minority shareholders after the company is delisted.
Under the first sale and purchase agreement, the shareholders of Essar Oil agreed to sell 49 per cent of the company’s equity to Petrol Complex Pte Limited (a subsidiary of Russia’s PJSC Rosneft Oil Company). As per the second agreement, the remaining 49 per cent stake is to be offloaded to Kesani Enterprises Company Limited (owned by a consortium led by Switzerland’s Trafigura). Both the agreements together carry an enterprise valuation of Rs 728 billion ($10.9 billion) and involve Essar Oil’s refining and retail assets. An additional transaction worth Rs 133 billion ($2 billion) pertaining to the acquisition of Essar’s Vadinar port in Gujarat was also finalised by the entities.
The formalities necessary for the completion of the deal, including the consent of international anti-monopoly authorities, are under way and are likely to be concluded by end-2016. Victoria Dix, spokesperson, Trafigura, says, “The agreement, which is expected to close by the end of 2016, is subject to anti-trust and other regulatory clearances.”
Meanwhile, the transaction was nearly aborted at an advanced stage, after a rival bid from Saudi Arabia’s state energy firm Aramco was received. Both Russia and Saudi Arabia, the two largest crude exporters in the world, have been eyeing asset acquisition in India.
Vadinar refinery: Paving the way for accessing the Indian energy market
Essar’s Vadinar refinery is the second largest in India and has a capacity of 20 million tonnes per annum (mtpa). It accounts for about 10 per cent of the country’s total refined output. In less than four years since its commissioning in 2008, the capacity of the refinery was increased from 10.5 mtpa to 20 mtpa, while refining “complexity” was enhanced from 6.1 to 11.8. It is also counted among the world’s most complex refineries.
Dix reiterates, “Vadinar is one of the largest refineries in India, already one of the world’s most important sources of growth in energy demand. It also has access to world-class storage and port infrastructure. As such, it offers multiple synergies with our trading business, from the supply of crude and offtake of refined products through the optimisation of global and regional trade flows to enhanced freight and logistical capabilities. The company also owns a domestic retail network business consisting of over 2,700 retail stations.”
The facility has so far processed over 90 types of crude oil, as it is highly flexible in terms of the raw materials that it can handle and is capable of refining heavy and sour oil grades. It also has access to a deep-water port capable of receiving crude through very large crude carriers. The refinery is capable of producing high quality Euro IV and V grade products. Further, the refinery’s safety record is equally remarkable – as on August 4, 2016, the refinery recorded 3,046 (8.2 years) “lost time injury-free” days and 2,631 (seven years) “fire-free” days.
Advantage India: Strategic acquisition
The transaction underscores the attractiveness of the Indian energy market and the untapped potential it offers in the coming years. Besides the huge market potential, the country also has a geographical advantage and provides easy access to other fast growing economies such as Indonesia, Vietnam, the Philippines and Australia in the Asia-Pacific region.
Dix says, “This investment will yield broad commercial benefits for Trafigura by giving us a strategic position in a major energy project. Essar Oil’s Vadinar refinery is a world-class asset – an ultra-modern super-refinery – located on strategic shipping routes to demand centres in the Far East and close to Middle East sources of production.”
She further adds, “Securing a minority stake in Essar Oil creates a platform for us both to maximise these benefits and to extend our exposure to the Indian market. It will enable us to build on our recent success in expanding our Indian oil trading business development capabilities in Mumbai. To put this in context, Indian oil demand growth in 2016 was in the region of 400,000 barrels per day, which is a 10 per cent year-on-year growth. This is equivalent to what we have seen in China in one of its stronger growth years. We would expect this strong growth of Indian oil demand to continue.”
Debt relief to Essar, banks
The Essar Group has been troubled by mounting debt. The proceeds from the transaction, which is the largest single foreign direct investment in India and the largest outbound deal for Russia, will help the company deleverage almost half its outstanding debt of Rs 880 billion. Besides, this would also substantially reduce the interest outgo. Meanwhile, this would also bring much respite to the banking sector that is burdened by a high level of stressed loans. Banks that have significant exposure to the Essar Group include the State Bank of India, ICICI Bank, Axis Bank and Punjab National Bank.
What next?
“Essar Oil will be managed by its board. The company has plans to expand its oil refining capacity and to build a petrochemical complex. The deregulation of pricing in the Indian retail market is expected to bring potential growth opportunities for the company’s retail network,” says Dix.
After the transaction is officially concluded, the Vadinar refinery is likely to start receiving crude oil from Rosneft. In July 2015, Essar Oil had signed an agreement with Rosneft for the supply of 10 mtpa of crude to the facility for a period of 10 years.
Essar Oil plans to invest an additional
Rs 12 billion over the next two to three years to upgrade the Vadinar refinery to boost refinery margins by $1.5 per barrel (gross refinery margin is a measure of a refinery’s operational efficiency). It is also weighing the option of reviving its petrochemical complex project with an investment of around $1 billion-$1.5 billion. It has
earmarked and acquired the required land to develop the petrochemical complex that would produce gasoline, liquefied petroleum gas and propylene, among other products.
The company, which runs a network of 2,700 operating retail outlets, has 2,850 additional outlets in various stages of implementation. Essar has a target of reaching 4,300 operational outlets by March 2017. The total capital investment in these outlets would be about Rs 21 billion, which will mostly be infused by franchisees.
The way forward
The Essar-Rosneft transaction has been a milestone for both India and the foreign entities. Russia stands to gain from the deal which would expand its geographical coverage of supply. Besides, it also brings relief to the sanctions-stricken oil and gas exporter. India, with its fast growing population and relatively small domestic oil reserves, has got on board a stable and experienced partner in the form of the largest national oil-producing company in the world.
