Russia's top oil producer Rosneft has taken a significant step towards expanding its global reach by signing a preliminary deal to acquire up to 49 percent in Essar Oil Ltd, India's second biggest private refiner. Rosneft had initially said it would buy into Essar's Vadinar refinery. But a company spokesman clarified on Thursday the deal included Rosneft entering into Essar Oil's charter capital, echoing a statement from the Indian firm.
The companies have signed a non-binding term sheet for Rosneft to buy an equity stake of up to 49 percent in Essar Oil, the Indian company said in a statement on Thursday. Rosneft, the world's top listed oil producer, has long sought to increase its exposure to the global markets but its efforts have been hampered by Western sanctions over Moscow's role in the Ukraine crisis.
The deal with Essar from India, a country Russia has close ties with since the Soviet era, was announced as Indian Prime Minister Narendra Modi met President Vladimir Putin on the fringes of a summit of emerging nations. Rosneft said on Wednesday that it had also finalised a deal to supply 10 million tonnes of oil a year, or 200,000 barrels per day, to Essar's Vadinar refinery over 10 years.
"Thanks to this agreement Rosneft grants itself a secure market outlet of crude oil, which will create an additional possibility of production planning and marketing," the company said in a statement. Rosneft has been in talks with Essar to buy a key stake in the unit that owns the Vadinar refinery, but the deal has faced delays due to difference over the price, sources have said. They said Rosneft valued the refinery at less than $6 billion, while Essar wanted a higher price.
The latest proposal to purchase a stake in Essar is conditional upon due diligence, determination of the transaction price, execution of definitive transaction documents and receipt of requisite approvals, the Indian refiner said. A source close to the matter said the entire process, including due diligence, will take at least two to three months. Rosneft is interested in only picking a stake in the refinery and there is a possibility that Essar Oil may have to hive off or de-link exploration assets from its portfolio, added the source, who did not want to be named because he was not authorised to speak to the media.
An Essar Oil spokesman said the agreement, as signed, was for the entire company, including its refining, exploration and marketing businesses. Mumbai-based Essar, whose business interests include steel, oil and gas, power and ports, has been forced to consider selling some of its assets to reduce its debt pile, after expanding in India and overseas in the last few years. Essar's founders own 90.5 percent of Essar Oil, of which 65.6 percent is in the form of overseas depository shares. Essar depends heavily on Iran to feed its 400,000 bpd Vadinar refinery in western India.