Essar Oil-Rosneft deal done, new owners focus on assets growth

To double the throughput of refinery; create petrochemicals facility in long term

The Essar group on Monday announced completing the sale of Essar Oil to a Rosneft-led consortium for $12.9 billion. With the consortium taking over $5 billion as debt and working capital, banks can expect better debt servicing and repayment from Essar Oil.

The Ruia-owned Essar group said it completed the sale of a 98 per cent stake in Essar Oil to Rosneft and the Trafigura-United Capital Partners (UCP) consortium.

“An asset development plan will be finalised to look for further investments to be made in the existing facilities,” said Tony Fountain, the new chairman of Essar Oil and a UCP nominee on the company’s reconstituted board of directors.

A Reuters report from Moscow quoted a Rosneft spokesperson as saying that Essar Oil plans to double the throughput of its refinery and create a petrochemicals facility in the long term.

The new Essar Oil board comprises four Rosneft nominees and two nominees each from Trafigura and UCP. The board also includes a nominee from Life Insurance Corporation (LIC), though Fountain said LIC’s exposure to the company would be paid off. The board will also include two independent directors.

Among those retained from the old management are L K Gupta, former chief executive officer of Essar Oil, who will continue as an adviser to the management board, and Manoharan Chakrapany, who will continue as a director for the refinery.

Essar Oil announced the appointment of B Anand as its new chief executive officer. Anand’s previous role was as chief financial officer of Trafigura India. Before that he was group director of finance for the Future Group and also held senior positions with the Vedanta Resources Group.

The company will continue to operate under the Essar brand and will pay the related brand licensing fee to the group.  A PTI report quoted Essar Oil’s non-executive director Jonathan Kollek as saying, “They cannot build a refinery, they cannot build petrol stations. There is a non-compete, forever.” However, group company Essar Energy remains invested in the oil and gas industry through its nine-million-tonne refinery in Stanlow, England. 

Though the deal is touted as the biggest foreign direct investment in India and Russia’s biggest outbound investment, it will immediately not lead to fresh investment flow. The transaction will bring down the Essar group's debt by Rs 70,000 crore, to Rs 40,000 crore, and end plans to sell assets to pare debt. “Of the total deal amount of $12.9 billion, about $5 billion debt held at group level will get settled through this transaction and another $6 billion debt of Essar Oil will be taken by Rosneft consortium,” explained Prashant Ruia, director, Essar Group. 

Sharing a break-up of the Rs 70,000 crore debt reduction at the group level, Essar Group said it included Essar Energy’s repayment of Rs 32,000 crore to lenders at the holding company level and another Rs 34,400 crore of loan in the operating companies — Essar Oil, Vadinar Oil, and VPCL — which would now be transferred to the new owners. Another Rs 4,000 core of the debt of three operating companies was also repaid to Indian banks. The Essar group’s $17-billion assets include facilities in the steel, power, ports, shipping, refining and gas industries.

Bankers said the Essar group’s real challenge remained in resolution of problems faced in the steel and power businesses. These two industries are facing a slump in demand and has constrained the group’s ability to service its debt. The Ahmedabad bench of the National Company Law Tribunal earlier this month admitted an insolvency petition against Essar Steel. 

Essar Oil will now seek to expand its retail network from 3,500 outlets to 6,000. Essar Oil’s Vadinar facility also has options for further expansion. All expansion options will be reviewed under the asset development plan. The new management is also expected to set up a committee to chalk out a development plan.

Essar Oil’s new management said the board would consider all possible crude oil sourcing options. “Today is no different from what it was yesterday in terms of crude or product contracts,” Fountain said.

The deal was completed 10 months after it was announced last October. The transaction was delayed by lenders seeking their exposure of Rs 45,000 crore be cleared. Prior to its announcement in October, the deal was in discussions for over a year.