Essar Oil to become India's third-largest refiner

Ruias-owned Essar Oil is set to emerge as India's third-largest oil refining company and one of the most complex refineries worldwide after it completes expansion of its Vadinar unit, according to an analyst report.

Essar is raising the Vadinar refinery capacity to 16 million tonnes from 10.5 million tonnes by December 2010 and further to 34 million tonnes in Phase-II expansion to be completed by December 2011, making it the country's third-largest refining company after Reliance Industries and Indian Oil Corp (IOC).

The report, issued yesterday by local brokerage HDFC Securities, said the expansions would help the firm earn about $3 more on processing of every barrel of crude oil.

"While refinery expansions will result in $3 per barrel premium over Singapore complex GRM (gross refining margin or earnings on processing of per barrel of crude), strategic focus on product evacuation will help maintain high capacity utilisation," it said.

After the expansion, Vadinar refinery in Gujarat would be able to process most of the dirty and difficult crudes that are sold at substantial discounts to premium crude like Bonny Light or Brent.

Its complexity index (a measure of the refinery's capability of process difficult crude) will rise from existing 6.1 to 11.8 in 2011-12 and to 12.8 in 2012-13. "EBITDA margins will rise from 3.1 per cent in FY09 to above 10 per cent from FY13E," the report said.

Essar Energy Holding, a unit of Essar Group, has been making inroads into the African and European markets through acquisition of refining and related assets. "These will play a strategic role in evacuating excess production from Vadinar as domestic supply glut widens."

HDFC said Essar's coal bed methane (CBM) block at Raniganj in West Bengal has a recoverable reserve of 1 trillion cubic feet and is expected to commence production in January-March quarter.

It has put a target price of Rs 191 on Essar Oil stocks, a 40 per cent upside over its current price of Rs 137.65.