Rosneft signs deal to take a 49% stake in Essar Oil

Russian oil major Rosneft has signed a preliminary agreement with the Essar group, controlled by the Ruias, to buy a 49 per cent stake in Essar Oil’s Vadinar refinery and supply 100 million tonnes of oil to the latter for the next 10 years.

Refining accounts for over 95 per cent of Essar Oil’s overall business. The deal is subject to regulatory approvals.

According to the deal contours, Rosneft will supply five million tonnes of crude oil to Essar Oil in 2015. Rosneft and Essar Oil had last December signed a preliminary contract for supply of 10 million tonnes of oil a year for 10 years. Commenting on the signing of the agreement, Rosneft Chairman Igor Sechin said: “The performance of the terms of the signed documents will have a substantial impact on the scale of economic cooperation between Russia and India. The goods trade between the two countries will grow by more than 50 per cent.”

Rosneft and Essar also plan to boost refinery output from 20 million tonnes a year to 45 million tonnes by 2020. The deal also includes a retail chain of 1,600 stations located in India; the parties plan to increase the total quantity of retail sites to 5,000 within the next two years.

Before the announcement of the agreement, the Essar Oil stock was trading 3.74 per cent higher than its previous BSE close, at Rs 188.6 a share. At Wednesday’s closing price, Essar Oil’s market capitalisation stands at Rs 27,337 crore.

Sources had earlier told Business Standard that the deal would fetch Essar Oil over Rs 10,500 crore, which might help the company reduce its debt burden. As of June this year, it had a debt of Rs 17,000 crore on its books.

To complete its debt-dollarisation programme, the company is in the process of availing of long-term export advance facility of $1.6 billion, backed by export performance bank guarantee/standby letter of credit, to repay the high-cost rupee loans.

Last April, Essar Oil had received the Reserve Bank’s approval to raise external commercial borrowings to the extent of $2.27 billion, to replace its rupee debt with low-cost dollar loans.

The company has already refinanced an equivalent amount of its rupee loan with a foreign-currency debt of $1 billion through use of ECBs and by swapping rupee loans with dollar ones.  Essar Oil owns and operates a refinery in Gujarat’s Jamnagar. Among its other assets are a few exploration and production blocks and coal-bed methane blocks. The company reported a profit of Rs 1,521 crore on a revenue of Rs 83,206 crore in 2014-15, mainly on account of higher gross refining margins of $10 a barrel.

DEAL DETAILS

• 49% The stake Rosneft is likely to buy in Essar Oil's Vadinar refinery
   
• 100 mt  Amount of crude oil Rosneft will likely supply to Essar over 10 years
   
• 45 mtpa Amount of oil Rosneft and Essar plan to extract from the refinery by 2020
   
• Rs 27,337 cr Essar Oil’s market cap by Wednesday’s closing
   
• Rs 10,500 cr The amount that the deal is likely to fetch Essar
   
• Rs 17,000 cr Total debt on the books of Essar Oil as of last month