Rosneft acquired 49% of Essar Oil Limited, gaining a stake in the high-tech oil refinery Vadinar, one of the most powerful such enterprises in India. The deal will allow the Russian company to enter the high-premium markets of the Asia-Pacific region (APR) and Southeast Asia, and, according to analysts, will help increase net profit by $500 million in 2018.
Rosneft has successfully completed a strategic transaction to acquire a 49.13% stake in Essar Oil Limited (EOL) from Essar Energy Holdings Limited and its affiliated companies, the company said in a statement, noting that the price parameters correspond to previously signed binding documents. At the same time, the event was announced by a consortium of international investors, which includes Trafigura and UCP. Thus, Rosneft acquired a stake in the high-tech Vadinar oil refinery in the state of Gujarat with a capacity of 20 million tons, with a refining depth of 95.5%, with a Nelson index of 11.8, which has all the necessary infrastructure, for example, the perimeter of the transaction included a deep-sea port, an oil terminal and a power plant.
India's cumulative GDP growth in 2013–2016 was 29.8%, and therefore the closing of the deal allowed Rosneft to enter one of the most dynamically developing world markets. In addition, this allows the company to develop international trading and enter the high-premium markets of the Asia-Pacific region and Southeast Asia.
“Starting today, a new stage in the life of EOL begins,” said Rosneft Chief Executive Officer Igor Sechin. – Together with our partners, we intend to significantly increase the financial performance of the enterprise and, in the medium term, approve a strategy for asset development. The closing of the deal is also significant for Rosneft - the company has entered the highly promising and fast-growing Asia-Pacific market. The acquisition of a stake in the Vadinar refinery creates unique synergistic opportunities with Rosneft’s existing assets and will contribute to increased efficiency of supplies to other countries in the region.”
“I congratulate Rosneft, Trafigura and UCP for investing in a world-class business that we are proud to create,” said Essar founder Shashi Ruia. “For Essar, the closing of this landmark transaction opens a new phase of growth across our business portfolio, which also means significant prospects for sustainable growth in India.”
According to Rosneft's calculations, the stake was acquired in an asset with significant development potential. The Vadinar refinery has great flexibility in terms of raw materials; more than half of all processed raw materials are heavy grades of oil. At the same time, the plant configuration is one of the most technologically complex in the Asia-Pacific region and has significant expansion prospects for the development of petrochemical production. The presence of all the necessary infrastructure, as well as a share in production projects in Venezuela and concluded supply contracts with PDVSA will allow Rosneft to obtain significant operational synergies and enhance the economic efficiency of the refinery. Another source of synergy will be cross-supplies of petroleum products to the Asia-Pacific markets, Rosneft is confident. It should also be noted that EOL has an extensive retail network of more than 3.5 thousand gas stations across India operating under the Essar brand. This distribution channel further enhances the operational and financial performance of the asset due to the steadily growing domestic demand for products with significant added value and the chosen retail expansion strategy (EOL aims to increase the current number of gas stations from more than 3,500 to 5,500 in the medium term).
“The Vadinar refinery is a large-scale oil refinery of high complexity (Nelson index – 11.8), which should increase Rosneft’s refining volume by approximately 7%,” UBS experts assess the events. “In addition, the deal opens up the fast-growing Indian market for Rosneft and will allow it to build a trading business in the region. In general, Rosneft has been actively improving the management of its asset portfolio in recent years. We estimate the contribution to Rosneft's net profit at $500 million, or around 6% of this figure since 2018. We believe additional potential lies in optimizing crude oil supplies."
“Entering the Indian retail market may be timely, since the consumption of petroleum products has resumed growth after a break associated with monetary reform, and the domestic market for motor fuel and LPG (liquefied petroleum gas) is being liberalized,” Uralsib representatives believe. .
Options for the development of the asset include the construction of a plant for catalytic cracking of residual raw materials and the production of polypropylene. In addition, a highly profitable project has been developed to increase the productivity of the refinery by 4 million tons per year. This project can be carried out through external financing and with minimal use of EOL working capital. According to the company, this will not require additional investment from shareholders. The project is possible to implement in 2017–2022. And the long-term plan generally calls for doubling the refinery's output and building a petrochemical plant.
Today is the time to invest in India for the long term. According to the IMF, GDP growth here will reach 7.7% next year, which will immediately make India the country with the fastest growing economy. Secondly, a significant increase in car sales is predicted, which could mean an increase in oil demand, which is already growing by about 10% per year. Recent research has shown that during periods of particularly rapid growth, car ownership increases twice as fast as GDP per capita. This will give India a 10 percent share of the world's vehicle fleet and more than 10 percent of global oil demand.
Rosneft, which recently sold shares in two fields in Eastern Siberia to Indian state companies, together with Trafigura and Ilya Sherbovich’s UCP, is buying Essar Oil, the second largest oil refinery in India. The deal creates “unique” opportunities for supplies to Asia, Igor Sechin said
Essar Oil refinery in the western state of Gujarat, India (Photo: Reuters/Pixstream)
Plant for Rosneft
Rosneft, the Dutch oil trader Trafigura, one of the largest sellers of its oil, and the UCP fund of Ilya Shcherbovich (in 2012-2013 was on the board of directors of Rosneft) signed agreements to purchase 98% of Essar Oil from Essar Energy Holdings and its affiliates companies owned by billionaire brothers Shashi and Ravi Ruia. This is stated in a message from Essar. Rosneft is acquiring 49%, its press service clarifies. A consortium led by Trafigura and UCP holds another 49%, the companies said.
The deal was announced on Saturday, October 15, in the presence of Russian President Vladimir Putin and Indian Prime Minister Narendra Modi at the BRICS summit in Goa.
Essar Oil owns India's second largest private oil refinery (refinery, capacity - 20 million tons per year, 9% of the local market), a "world-class" oil storage facility, a port and developed infrastructure for the import and export of oil and petroleum products, located near the city Vadinar, as well as a network of more than 2.7 thousand gas stations in India, is indicated in messages from Trafigura and UCP. Diversified Essar Group has decided to monetize one of its key assets after Rosneft and other foreign companies "showed strong interest" in buying a stake in Essar Oil, the company said in a statement. Proceeds from the deal will allow the group to reduce its debt, which amounts to about $13 billion, by almost 50%.
The consortium of Trafigura and UCP also included one of the Essar structures; the three companies entered into a “strategic partnership,” their press services reported. Trafigura and UCP will each receive approximately 24% of Essar Oil, and the Essar structure will receive approximately 1%, according to their reports. This is how the deal is structured; the Ruia brothers decided to keep a small stake in the company, a source close to one of the participants in the deal explained to RBC.
The total “acquisition cost” of 100% of Essar Oil (including debt) will be $12.9 billion, reports the Rosneft press service. Essar Oil with its refinery and gas station network was valued at $10.9 billion, and the port in Vadinar and related infrastructure was valued at another $2 billion, Essar clarifies. According to Reuters, Essar Oil's debt is $4.7 billion, that is, the partners had to pay $8.2 billion for 100%. Essar's message indicates that the deal will be entirely cash.
Essar Oil shares were valued at approximately $5.8 billion - this is how much the company was worth on the stock exchange before delisting, Essar Group Director Prashant Ruia (son of one of the main owners of the group, Shashi Ruia) told reporters at a briefing. Thus, taking into account the port, Indian assets will cost $7.8 billion. Based on this amount, Rosneft will pay about $3.8 billion for 49%, and Trafigura and UCP - $1.9 billion each. The Russian state-owned company’s message notes that that the price of this stake will be determined "based on the actual value of net debt and net working capital at the time of closing of the transaction." Rosneft is expected to pay about $3.5 billion for its stake, its representative explained. This was confirmed by Andrey Kostin, Chairman of the Board of VTB, VTB acted as a consultant to the sellers - the Essar group, reports Bloomberg. VTB will also provide Essar with another $3.9 billion for debt restructuring, he added. “This is the largest investment in the history of India,” Kostin (quoted by TASS).
For Rosneft, the purchase of a stake in an Indian company is a “historic event,” Sechin said (his words are quoted in the company’s statement): it is entering one of the most promising and fastest-growing markets in the world. According to the International Energy Agency, India is the world leader in the growth rate of oil consumption and by the end of 2016 will become the third largest buyer, surpassing Japan. This deal creates “unique synergistic opportunities” for both existing Rosneft assets and planned Rosneft projects and opens up prospects for increasing the efficiency of supplies to the markets of other countries in the Asia-Pacific region, such as Indonesia, Vietnam, the Philippines, Australia , added the head of the Russian state-owned company.
The main sources of synergy will be the possibility of processing heavy oil from Venezuela, the supply agreement for which Rosneft entered into with PDVSA in the summer of 2016 (it plans to supply 10 million tons of Venezuelan oil annually to the Essar Oil refinery for ten years), as well as cross-supplies of petroleum products to the Asian markets, which will enhance the economic efficiency of the Indian oil refinery, the company said in a statement. The Rosneft press service did not respond to clarifying questions.
Trafigura representative Victoria Dix told RBC that the purchase is being carried out using borrowed bank financing (secured by shares of the refinery) and its own funds. According to India's NDTV, Trafigura received a loan for this deal from VTB and may later sell its stake in Essar Oil (24%) to Rosneft. VTB CEO Andrei Kostin said that the bank did not provide loans to either Trafigura or Rosneft for the deal. Dix and a Rosneft representative do not comment on the issue of an option to sell Essar Oil shares. A source close to one of the participants in the deal claims that neither Trafigura nor UCP have a put option. A UCP spokeswoman declined to comment.
The deal shows how major oil-producing countries are investing in refineries abroad to ensure demand for their products amid intense competition for market share between OPEC members and non-OPEC producers, Bloomberg writes. Similarly, Saudi Aramco of Saudi Arabia is buying stakes in factories around the world, from Indonesia to the United States.
Billions from India
As part of the BRICS summit, Rosneft also signed an agreement “to prepare for the closing of the transaction” to sell an additional 11% of Vankorneft to India’s ONGC for approximately $930 million, the Russian company said on Saturday. This deal has already been approved by the government commission on foreign investment in Russia and the economic committee of the Indian government, and is scheduled to be completed by the end of October.
ONGC bought the first 15% of Vankorneft in May for $1.27 billion, and on October 5, Rosneft sold another 23.9% of its subsidiary to a consortium of Indian companies, consisting of Oil India, Indian Oil Corporation and Bharat Petroresources, for approximately $2.02 billion. Thus, in a series of transactions in just six months, Rosneft sold 49% of Vankorneft for $4.22 billion, retaining control. Rosneft is completing the implementation of a project to create a unique international energy hub on the basis of the Vankor cluster in a short time, the company said in a statement.
Vankorneft is developing the largest of the fields put into operation in Russia over the past 25 years: as of January 1, 2016, its oil reserves amounted to 265 million tons of oil and condensate, 88 billion cubic meters. m of gas. In 2015, the field produced 22 million tons of oil and 8.7 billion cubic meters. m of gas.
Gas for India
On the sidelines of the BRICS summit, Gazprom CEO Alexey Miller and Engineers India Managing Director Sanjay Gupta signed a memorandum of understanding, which “reflects the parties’ interest in a joint study of pipeline gas supply routes from Russia and other countries to India,” Gazprom’s press service reported. . To implement this memorandum, the parties will form a working group.
“I am convinced that Gazprom and Indian companies have significant prospects for mutually beneficial cooperation in the gas sector,” Miller said. According to him, India’s gas consumption at the end of 2015 amounted to 56.5 billion cubic meters, while its own production is decreasing, and the share of imports is “dynamically” growing. The need for gas imports will triple by 2022 alone, and by 2030 by more than six times, he said.
At the Russian-Indian negotiations, “they discussed the supply of not only pipeline gas, but also liquefied gas, and the second stage of NOVATEK’s Arctic LNG-2 project,” added Energy Minister Alexander Novak. Russia invites Indian companies to participate not only in the capital of Arctic LNG-2, but also in the supply of liquefied natural gas (LNG) to India, he specified.
In early October, the same consortium received a share of Rosneft in another project in Eastern Siberia - 29.9% of Taas-Yuryakh Neftegazodobycha, which is developing the Srednebotuobinskoye oil and gas condensate field - for $1.12 billion.
In addition, Rosneft and the expanded consortium, already consisting of five Indian state-owned companies (Oil India, Indian Oil Corporation, Bharat Petroresources, ONGC and Hindustan Petroleum Corporation), announced their intention to expand cooperation in Russia: they intend to begin negotiations in the near future on the possible acquisition of shares in the Suzunskoye, Tagulskoye and Lodochnoye fields, which also belong to the Russian company. The three fields are viewed as a “single asset,” it said in a statement.
Rosneft has closed a deal to acquire 49% of an oil refinery in India. Thus, the company enters the promising and fast-growing petroleum products market in the Asia-Pacific region. The deal will increase the company’s oil refining volume by 7%, analysts calculated for Izvestia. And the contribution to Rosneft’s net profit for 2018 could reach $500 million.
The Essar Oil Limited (EOL) oil refinery has a capacity of 20 million tons per year, its processing depth is 95.5%. More than half of all processed raw materials are heavy oil. A similar share of 49.13% of the refinery was acquired on August 21 by a consortium of international investors, which includes the international trader Trafigura and the investment fund UCP. 2% remained with minority shareholders. In addition to the refinery, the deal structure included a retail business, a deep-sea port, reservoirs and a power plant.
The refinery's configuration is one of the most technologically complex in the Asia-Pacific region and has significant expansion prospects for the development of petrochemical production, Rosneft believes.
EOL has an extensive retail network of more than 3.5 thousand gas stations across India, which operate under the Essar brand. The presence of this sales channel further increases the operational and financial performance of the asset, the company added.
The acquisition of a stake in the Indian refinery creates “unique synergistic opportunities with Rosneft’s existing assets and will contribute to increased efficiency of supplies to other countries in the region,” said the company’s chief executive officer, Igor Sechin, following the deal, which closed on August 21.
Analysts surveyed by Izvestia estimated that net profit growth in 2018, taking into account the acquired refinery, could reach $400–500 million.
We estimate the contribution to Rosneft's net profit at $500 million, or about 6% of this figure, starting in 2018. We believe additional potential lies in optimizing crude oil supplies,” UBS said.
UBS analysts also estimate that the Indian refinery should increase Rosneft's total refining volume by about 7%.
In addition, the deal opens up the fast-growing Indian market for Rosneft and will allow it to build a trading business in the region, the bank said.
Entering the Indian retail market may be timely, since consumption of petroleum products has resumed growth after a break associated with monetary reform, and the domestic market for motor fuel and liquefied petroleum gas is being liberalized, Uralsib analysts say.
The oil products market in India is one of the most dynamically developing world markets: the cumulative growth of India's GDP in 2013–2016 was 29.8%, calculated Rustam Tankaev, a member of the Russian Chamber of Commerce and Industry Committee on Energy Strategy.
Assets of this scale and quality are rarely available on the market, which makes this transaction unique and valuable,” the expert concluded.
According to him, the presence of all the necessary infrastructure at the refinery, shares in production projects in Venezuela and oil supply contracts with the Venezuelan state-owned company PDVSA will allow Rosneft to obtain significant operational synergies and increase the economic efficiency of the refinery.
The Vadinar refinery became a profitable acquisition for a consortium of international investors led by Rosneft. Photo by the press service of PJSC NK RosneftThe Russian company has closed a deal to acquire a 49% stake in Essar Oil
The largest Russian oil company has successfully closed a strategic transaction to acquire a 49.13% stake in Essar Oil Limited (EOL) from Essar Energy Holdings Limited and its affiliated companies. At the same time, a consortium of international investors, which includes the European trader Trafigura and the investment group UCP, announced the closing of the deal to acquire 49.13% of EOL. The remaining 2% of EOL is owned by private shareholders. Experts report that the price parameters of the transaction correspond to the previously signed binding documents.
As the Financial Times notes, “the consortium has overcome hurdles posed by Indian regulators and lenders to complete what will be the largest foreign direct investment in India to date.” This means that the Russian company has come to this country seriously and for a long time.
Unique deal
The closing of the deal allowed Rosneft to enter one of the most dynamically developing world markets. Suffice it to say that India's cumulative GDP growth in 2013-2016 was 29.8%. Rosneft has acquired a stake in a first-class asset with significant development potential. The refining capacity of the Vadinar oil refinery is currently 20 million tons per year.
In terms of processing volumes, this refinery is the second in India (the plant can process 400 thousand barrels of crude oil per day), and in terms of technological complexity it is one of the ten best plants in the world (Nelson complexity index - 11.8). The refinery has high feedstock flexibility and is capable of processing a wide range of crude oil from Rosneft's own and trading assets, including the heaviest grades. The refinery's configuration is one of the most technologically complex in the Asia-Pacific region and has significant prospects for the expansion and development of petrochemical production (favorable preconditions for this are provided by the refining of heavy oil).
The main sources of synergy will be the possibility of refining heavy oil from Venezuela and cross-supplying petroleum products to the Asia-Pacific markets. This will significantly increase the economic efficiency of the refinery (Gross Refining Margin), which since the beginning of the EOL financial year (April 2016) has exceeded $10 per barrel of refining. It should be noted that Venezuelan oil already accounts for more than half of all supplies to the plant. And, as analysts emphasize, “supplies of its own Venezuelan oil to India will allow Rosneft to provide a sales market, without having a negative impact on the company’s position in Europe.” “Shares in production projects in Venezuela and concluded supply contracts with PDVSA will allow Rosneft to obtain significant operational synergies and enhance the economic efficiency of the refinery,” the company said in a press release.
The deal also included a deep-water port with a capacity of 58 million tons, which can accommodate ultra-large VLCC tankers with a capacity of up to 350 thousand tons, which reduces the cost of supplies from remote regions. In addition, under the terms of the deal, the new shareholders received oil terminals, hydrocarbon storage tanks and their own power plant - a 1,010 MW multi-fuel plant that supplies electricity and steam to the refinery.
According to experts, assets of this scale and quality are rarely available on the market, which makes the deal unique. Moreover, the new owners were attracted not only by the assets themselves, but also by their significant growth potential. Suffice it to recall that, according to the Goldman Sachs forecast, oil demand in India will grow by an average of 6% annually until 2020. This is the fastest growth rate in the world.
Step into the Asia-Pacific region
In the fall, Essar Group director Prashant Ruia said in an interview with Bloomberg that five large oil and gas companies, in addition to Rosneft, were vying for the Vadinar refinery, but did not specify which ones. According to Bloomberg's own sources, in addition to Saudi Aramco, National Iranian Oil Co. showed active interest in the plant. Bloomberg then headlined an article about the agreement with Essar, “Megadeal Allows Russia to Conquer Territory in the Middle East’s Backyard.” “This is a response to Saudi Arabia’s attempts to enter the European market, which is currently dominated by Russian oil,” summed up Abhishek Kumar, an analyst at Energy Global Gas Analytics. Experts emphasize that in conditions of saturation of world oil markets, the struggle of raw material producing countries for access to foreign refining capacities is intensifying.
Of course, the deal with the Indian Essar will strengthen the position of Rosneft’s trading division in the Asian market. It is very significant that Trafigura, which is one of the world's leading traders, highly values entry into the capital of EOL (the company itself failed in its first attempt to establish itself in India five years ago).
“The Vadinar refinery makes it possible to efficiently process heavy Venezuelan oil received by Rosneft under already concluded contracts,” notes Mikhail Delyagin, director of the Institute of Globalization Problems, “and thus provides the Russian company with effective access to both the highly profitable markets of Southeast Asia and Asia. the Pacific region, and to the rapidly growing domestic market of India, which is already the fourth largest oil importer in the world. And deregulation of pricing in the Indian retail market further enhances its commercial attractiveness.”
At this stage, the shareholders plan to sell about 40% of the total volume of products produced by the plant to foreign markets. In the future, as demand from domestic consumers grows, the focus on the local market will be strengthened. “Vadinar” is an operating enterprise, says Rosneft. — The plant is already making significant supplies to the Indian domestic market. Taking into account the increase in energy consumption in India, supplies to the country’s domestic market will only increase, so the Vadinar refinery will not provide significant competition to new and promising projects in Tianjin or Tuban, which may enter the Asian market in 2020-2022.”
Commenting on the closing of the deal, Rosneft Chief Executive Officer Igor Sechin said: “Starting today, a new stage in the life of EOL begins. Together with our partners, we intend to significantly increase the financial performance of the enterprise and, in the medium term, approve a strategy for asset development. The closing of the deal is also significant for Rosneft - the company has entered the highly promising and fast-growing market of the Asia-Pacific region. The acquisition of a stake in the Vadinar refinery creates unique synergistic opportunities with Rosneft’s existing assets and will contribute to increased efficiency of supplies to other countries.”
“Any supplier must look for new markets,” notes Chris Zilitzky, a Rosneft-nominated member of the board of directors of Essar Oil. — This is how the company develops. If we look at Europe, we see a decrease in the use of crude oil, therefore, we need to look for an adequate response to these challenges. And new markets can be found in China and India, and we must enter these markets, which are the future.”
Three in one: a successful combination
“The Indian market is now experiencing very positive dynamics,” the head of Rosneft noted in an interview with the Financial Times. — It was a difficult project... Every good deal, every masterpiece requires some effort. This project is truly a gem, a pearl among our projects.”
After the deal was closed, Rosneft had great potential to expand its presence in the markets of other Asia-Pacific countries, such as Indonesia, Vietnam, the Philippines and Australia. According to Trafigura Chairman Jeremy Weir, “Essar Oil will now be able to take advantage of its international investors to further develop and enhance the value of these world-class assets. Our stake in Essar Oil will enable Trafigura to strengthen its presence in India at a time when the country's economy is growing at a rapid pace."
The new shareholders will certainly bring their experience to EOL's operations. “This is an excellent combination,” explains the head of the company’s strategic development department, Krzysztof Zilicki, “in which Rosneft, which has large reserves of crude oil, participates; Trafigura, which can support trade volumes; and an investment group that deals with project financing and investments. We combine these three factors: trade, oil supply and foreign investment."
Yes, the Vadinar refinery today concentrates on heavy and extra-heavy grades of oil. However, the oil ration will depend on market conditions and commitments at a particular time. National Indian companies will in any case remain important counterparties: Essar Oil will rely on existing relationships to meet India's energy needs. Iranian oil, which historically was supplied to Vadinar, may remain an important part of the refinery’s raw material diet.
However, the new shareholders emphasize that the most attractive sources from an economic point of view will be selected for supplies. As Rosneft noted, “Given the size of the Russian portfolio of our assets, as well as our growing international portfolio, it seems logical for us to play an active role in the commodity and product markets to ensure a net producer price for all of the company’s market positions.”
Retail expansion
EOL has an extensive retail network of more than 3.5 thousand gas stations across India, which operate under the Essar brand (and a year ago there were less than 2 thousand). The presence of this stable sales channel further enhances the operational and financial performance of the asset due to the steadily growing domestic demand for products with significant added value and the chosen retail expansion strategy. The previous owners invested heavily in the development and marketing of the stations, and as a result, Essar is considered a recognized brand in the local market. Unsurprisingly, the new shareholders have no plans to change the retail brand.
“Trafigura and Rosneft are the latest international companies after Royal Dutch Shell and BP to enter the Indian fuel retail market,” Indian media note. And this market is very promising. After all, the abolition of pricing regulation has opened up enormous prospects for growth in retail sales. EOL, it should be noted, has already outlined large-scale plans for retail expansion. The company aims to increase the current number of gas stations from 3.5 to 5.5 thousand in the medium term.
Shareholders' plans
Essar Oil's existing assets generate stable cash flow sufficient to meet all obligations and finance the development program. Essar Oil Limited constantly monitors market dynamics and benchmarks competitors and takes into account the information received when implementing its strategy. Rosneft, together with other shareholders of Essar Oil Limited, will consider all options for further investment and expansion of the capacity of the Vadinar refinery. In accordance with the agreements reached, the company will not have obligations to implement the modernization program - at the moment it is recorded as the intention of the parties. However, an international consortium of investors hopes to improve the efficiency of the business's operating model. The Vadinara oil refinery was built in 2008 and recently underwent further modernization in 2012. The next scheduled maintenance was carried out in 2015 with a turnaround cycle of three to four years.
Essar Oil has development plans that the new board of directors will consider. For example, there is an annual investment program that includes ongoing projects aimed at modernizing production facilities. Development options include using project financing to increase feedstock processing volumes, construct a catalytic cracking unit for residual feedstocks, and produce polypropylene. In addition, according to the shareholders, the company has developed a highly profitable project to increase the productivity of the refinery by 4 million tons per year. This project can be carried out through external financing and with minimal use of EOL working capital.
“As we expect, this will not require additional investments from shareholders,” Rosneft notes. — The project is possible to implement in 2017-2022. As for the long-term plan, it involves doubling the productivity of the oil refinery and building a petrochemical plant. However, we will be able to talk about specific plans only when the company’s strategy is studied and approved by the board of directors.”
New management standards
Shareholders will ensure that EOL will operate to the highest standards of governance in the future. The new board of directors, consisting of shareholder representatives as well as independent directors, will make key strategic and commercial decisions. There will be 12 people on the council: four of them will be nominated by Rosneft, two by Trafigura, and two by UCP. Moreover, the directors appointed by Rosneft and the international consortium will not be able to make decisions without the support of independent directors, which is very important for the next stage of development of the asset.
The council will be headed by Tony Fountain, a respected representative of the industry: his experience in the oil industry is more than 30 years. He worked most of the time at BP, built the company’s business strategy in India, was a top manager at Indian Reliance Industries, and therefore knows the specifics of the local market very well.
“In my opinion, the attractiveness of the deal for investors is obvious,” Fountain said at a press conference in Mumbai. “This is an important part of India's energy infrastructure. It is very rare that you get the opportunity to purchase assets of this quality. This is very attractive for investors who immediately imagine not only the current state of their assets, but also ways to develop them.” Shareholders emphasize that they will always look to strengthen the board of directors, as well as the management team, which is now headed by B. Anand, the former chief financial officer of Trafigura's Indian unit.
This is a deal you can be proud of
Attracting international investors in India is perceived extremely positively. “I congratulate Rosneft, Trafigura and UCP for investing in a world-class business that we are proud to create,” said Essar founder Shashi Ruia. “For Essar, the closing of this landmark transaction opens a new phase of growth across our business portfolio, which also means significant prospects for sustainable growth in India.”
“With Essar's successful completion of the transaction, Rosneft and the Trafigura-led consortium will be active partners in India's remarkable development story and will reinvigorate the Indian oil sector in the international market,” said Amitabh Kant, executive director of the think tank. Public Policy Affairs NITI Aayog.
According to Petroleum and Natural Gas Minister Dharmendra Pradhan, "a truly Indian national asset has attracted investment from world-class enterprises, a testament to the country's entrepreneurial spirit." “I welcome the entry of Rosneft, Trafigura and UCP into the Indian success story,” he added.
Back in the fall of last year, when the deal was announced, Morgan Stanley analysts noted: “We believe that the deal is justified by the high growth in fuel demand in India (compared to the global average), as well as market protection due to import duties and high level of refining at the Vadinar refinery (Nelson index - 11.8), which allows for high refining margins (above $10 per barrel from April 2016 to the present, versus $6.6 per barrel in Singapore for the same period). We also recognize as potential benefits of the transaction the possibility of using large volumes of heavy and cheaper Venezuelan oil at the refinery (part of Rosneft's plans), Essar's plans to expand its retail network and opportunities for further expansion of capacity (for example, development of petrochemicals)."
UBS analysts also evaluate the deal positively. “The Vadinar refinery,” they write, “is a large-scale oil refinery of high complexity (Nelson index - 11.8), which should increase Rosneft’s refining volume by approximately 7%. In addition, the deal opens up the fast-growing Indian market for Rosneft and will allow it to build a trading business in the region. In general, Rosneft has been actively improving the management of its asset portfolio in recent years. We estimate the contribution to Rosneft's net profit at $500 million, or about 6% of this figure since 2018. We believe additional potential lies in optimizing crude oil supplies."
“Entering the Indian retail market may be timely, since consumption of petroleum products has resumed growth after a break associated with monetary reform, and the domestic market for motor fuel and liquefied petroleum gases is being liberalized,” Uralsib analysts say.
Integral approach
“This is part of a huge deal to exchange assets with India,” notes Rustam Tankaev, director of InfoTEK-Terminal. — Indian companies received stakes in Rosneft’s production assets in Russia, and in exchange Rosneft received 49% in Essar Oil. This company has very serious assets. Firstly, this is, of course, the oil refinery in the city of Vadinar. Vadinar is a port city, the plant's capacity is approximately twice that of the Moscow Oil Refinery. It is provided with a huge sales network, and this network is developing very quickly. In addition, the company owns an oil loading port in Vadinar, which is connected to the plant, and this allows both receiving oil from the sea and shipping petroleum products to the foreign market. In terms of its characteristics, the port is approximately equal to our Novorossiysk port. This entire system of assets allows Rosneft to gain access to 20%, that is, a fifth of the Indian oil market and the most promising oil product market in the world.”
It is worth noting that in partnership with Indian companies, Rosneft adheres to an integral approach. In addition to a large-scale oil refining project that will allow it to gain a foothold in the South Asian market, Rosneft is actively developing cooperation with leading Indian upstream players, involving them in the development of promising greenfields.
Rosneft successfully completed the implementation of a project to create a unique international energy hub based on the so-called Vankor cluster in a short time. The share of Indian state-owned companies in it was 49.9%. At the same time, Rosneft retained a majority stake in the capital, control over the operating activities of the company, as well as 100 percent control over the general infrastructure of the cluster. The achieved valuation of the Vankor project is $3.4 per 1 barrel of hydrocarbon reserves (according to the 2P category of the PRMS methodology) and reflects the high potential of the project’s resource base.
An international consortium was also created on the basis of Taas-Yuryakh Neftegazodobycha LLC, which, in addition to Rosneft (share of shares - 50.1%), included BP and state-owned Indian oil and gas companies. And now the entry of Indian companies into Russian projects has been harmoniously complemented by a breakthrough in India, where Rosneft received a stake in the Vadinar oil refinery.
Window to Asia
Of course, the deal to acquire Essar Oil is also important from a geopolitical point of view. Shareholders will gain control of a deep-water port in the Indian Ocean near the Persian Gulf.
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“The strategic cooperation between Russia and India, established through the titanic efforts of the Soviet Union,” writes Mikhail Delyagin in Moskovsky Komsomolets, “was destroyed in 1993. Then, under pressure from the United States, the Russian leadership refused to supply India with cryogenic rocket engines, which were supposedly of defense importance, only for the American corporation to immediately supply India with similar engines. After this, the partnership was restored with great difficulty, but mainly only in the military sphere. And this one-sidedness has only now been eliminated - after the completion of the Rosneft deal.
According to the expert, new strategic prospects are opening up for our countries. “Thanks to the comprehensive nature of the deal,” notes Mikhail Delyagin, “India gets guaranteed access to sources of raw materials and reliable satisfaction of its growing needs, and Russia gets a window into the fastest-growing regions of the coming decades. And if Peter I “cut a window to Europe,” now Russia has promptly restored the road to Southeast Asia - a region whose importance for world development is quite consistent with the importance of Europe for the 18th and 19th centuries.” In any promising business, the most important thing is the first step. “The conquered bridgehead can and should be expanded by representatives of other industries, but the main step has been taken: Russia has returned to the region, which is clearly becoming the heart of world development, and returned on time,” the author sums up.
Today is the time to invest in India for the long term. The Indian economy grew by almost 30% between 2013 and 2016 and is now growing at more than 7% per year: this is the highest level of any major country. Demand for oil is already growing by about 10% per year, and in the next 10-15 years a qualitative transition in the level of well-being of Indians is expected, due to which the country’s vehicle fleet will more than quadruple: from the current 43 million units to 187 million in 2030. India's automobile fleet is expected to reach 10% of the global total, and oil demand is expected to exceed 10% of global levels. According to the forecast of the International Energy Agency, in 2040 the consumption of petroleum products by the Indian automobile sector alone will increase by more than 4 times. And Russia's entry into the Indian market is certainly a far-sighted decision.
