ANALYSIS. Essar deal is a win-win for Rosneft

Debt-ridden Essar Group needed money, and Russia’s state-owned Rosneft wanted access to a large oil market, so a deal was struck.

On the face of it, this is how the announcement on Saturday between the two is being perceived. But it may not be so simple.

Read the fine print. The deal was struck at the bilaterals between India and Russia, in the presence of their respective heads of states, on the sidelines of the BRICS summit in Goa.

Do we need a bilateral platform to conclude a deal for which the intent had already been inked earlier? It is difficult to separate energy deals from geopolitics. Indeed, under this arrangement, a sanctions-hit Russia gets access to a crucial hydrocarbon market.

Subtle message This is a subtle but clear message from the two countries to the rest of the world, said an energy expert, without naming the US. The deal has not been struck by Rosneft alone, but along with an investment consortium, which is “a way to skirt the sanctions. The majority stake hasn’t gone to Rosneft alone,” experts say.

Of course, the deal will help the Essar Group meet its primary objective: to pare down its mountain of debt.

The total debt of the group is about ₹88,000 crore; Essar has for long been under pressure from lenders to deleverage.

As with any deal, there are skeptics who say: “Let us see how much foreign direct investment will actually flow into the country from the deal — and how much gets parked in a third country (Mauritius).”

But the unanimous reaction is that Rosneft is the clear winner in this deal .

“It is a win-win for Rosneft: It secures a guaranteed demand for its crude, becomes a refining biggy internationally; and gets access to the world’s fastest-growing oil market — India,” said Narendra Taneja, India's leading energy expert. According to Taneja, Rosneft may expand its refining and port capacity.

Besides, the Russian buyer will look to build a bigger, modern network of retail outlets across India, which in turn will shake up the Indian refining and retail sector, which has for decades been crying for the infusion of modern technology and global retail practices, he said.

BP too gets a foothold With this deal, BP also makes an indirect entry into India’s refining space.

Though the Russian government has a majority stake in Rosneft, BP has 19.75 per cent of the shares.

Competition in India’s downstream space, particularly in the western part of the country, will get more interesting, with Mukesh Ambani-owned Reliance Industries’ two refineries in Jamnagar, and now Rosneft in Vadinar with equal muscle power.

Essar Oil’s 20 mtpa Vadinar refinery accounts for about 9 per cent of India’s installed refining capacity. Located close by are the two refineries of Reliance Industries (60 mtpa) accounting for another 26 per cent. Public sector entities operate 21 refineries across the country, besides two joint venture refineries.

Till recently, Indian public sector oil retailers have enjoyed a monopoly in the fuel retail business, with private players such as Reliance Industries, Essar Oil, and multinational Shell gasping for survival.

With decontrol of fuel prices, the situation eased somewhat, and now with Rosneft, competition will get tougher.

Similar projects Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP, focussing on Oil & Gas Energy, said: “This big-ticket investment will revive the downstream sector, and set the stage for enhanced flow of energy-related cooperation and oil trade with Russia. The experience from this project could propel investment into the gas industry, creating momentum for Middle East investors in similar projects.”

Echoing that thought, Taneja said: “It will change the image of India as an investment destination in oil refining and retail. Saudi Aramco, Chevron and Kuwait Petroleum may want to invest, most likely in partnership with Indian oil PSUs.”