Essar signs 10-year multi-billion dollar oil deal with Rosneft

New Delhi/Mumbai: Essar Oil Ltd on Thursday signed a deal with Russia’s OAO Rosneft, the world’s largest publicly traded oil company, to import 10 million tonnes (mt) of crude oil a year for 10 years, during Russian President Vladimir Putin’s visit to India.

At the current price of oil, the deal would be valued at approximately $40 billion over the 10-year period. A person familiar with the matter who asked not to be identified said that’s the number he has been hearing.

Rosneft and Essar have signed key terms of oil and oil products supplies to Essar refineries in India, the Russian firm said in a statement.

“Supplies may begin in 2015. Consequently, Rosneft expands its distribution area and builds up deliveries to the region, where the world’s economy growth zones are concentrated,” the statement said.

An agreement to this effect was signed in New Delhi by Igor Sechin, chief executive officer (CEO) of Rosneft, and Shashi Ruia, founder of the Essar Group, in the presence of Putin and Prime Minister Narendra Modi.

Lalit Kumar Gupta, managing director and CEO of Essar Oil, declined to comment.

The Essar Group said in a statement that the two companies signed key terms of crude and oil product supplies by Rosneft to its Indian refinery. Russian bank VTB also signed a deal to open a $1 billion credit line to Essar.

Essar last year signed a similar $1 billion debt-for-fuel deal with China, but the contract has yet to take off.

A second person close to development said the (VTB) deal is intended to finance the continued consolidation of certain assets in the Essar Group’s investment portfolio and the strengthening of its capital structure. This financing follows a $1.2 billion transaction arranged in the first half of 2014 by VTB Capital, which acted as financial adviser and financier for the Essar Group in taking its key assets private, which were listed on the London Stock Exchange. This person didn’t want to be identified.

“There is a possibility of a swap deal between Rosneft and Essar, which may have got a deep discount in prices to justify freight for a long haul crude,” said Ehsan ul Haq, a senior consultant at UK-based consultant KBC Energy Economics.

Essar had recently opened a trading office in Geneva.

Haq said Essar may cut imports from Iran to accommodate Russian barrels. Essar depends heavily on Iran to feed its 400,000 barrels per day (bpd) Vadinar refinery.

Rosneft is majority owned by the Russian government with BP Plc holding under a 20% stake and public shareholders around 10%.

The price of Brent crude has fallen about 41.53% over the past year.

The deal could be worth as much as $45 billion for 10 years, assuming oil prices hover around $60 a barrel, a third person said, asking not to be named. “However, the crude oil prices are always volatile and companies cannot fix a price for 10 years.

The deal ensures energy security for the company as it provides a linkage to raw material for refining capabilities built by the Essar Group, said an Essar executive, who asked not to be identified.

“For our Indian partners, the signing of this agreement represents a vital element of basic supplies diversification which, at the same time, will ensure energy security for the country. The Russian counterpart, in turn, will get the possibility of production and supplies volume planning to a new region with considerable growth potential,” Rosneft’s Sechin said.

Putin is seeking to woo Asia’s third largest economy with energy deals as he seeks to build better economic ties with India in the backdrop of a slew of Western sanctions on Moscow for the annexation of Crimea and its support for rebels in neighbouring Ukraine.

Rosneft’s businesses include hydrocarbon exploration and production; upstream offshore projects; refining; and crude oil, gas and product marketing in Russia and abroad, while Essar Oil is an oil and gas company with a strong presence across the hydrocarbon value chain from exploration and production to refining and oil retail.

On Thursday, shares of Essar Oil fell 1.26% to Rs.110.05 on BSE, while the exchange’s benchmark Sensex fell 0.82% to close at 27,602.01 points. Rosneft declined 3.14% to trade at 206.8 rubles at 8.30pm India time, while the Micex index lost 2.57% to trade at 14,48.64 points.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.