Business Today

How Essar-Rosneft deal will change India's oil map?

The entry of Rosneft is seen as a game changer in this context as they plan develop India as their refining hub for the region, in addition to opening more retail outlets in the country.

twitter-logoNevin John | August 22, 2017 | Updated 10:59 IST
Essar-Rosneft deal sets stage for face off between the Russian oil giant,Mukesh Ambani's RIL

The Indian oil play has been quite dull for many years after MNCs lost interest in acquiring exploration and production (E&P) assets--- thanks to the smaller reserves and the frequent government interventions and litigations in the business. The downstream (refining) business was dominated by a group of state-run companies --- including IOC, BPCL and HPCL--- and the private majors Reliance Industries (RIL) and Essar Oil. The entry of Rosneft is seen as a game changer in this context as they plan develop India as their refining hub for the region, in addition to opening more retail outlets in the country.

Rosneft's entry will surely lead to a face-off between Mukesh Ambani-controlled RIL and the Russian oil giant in the crude refining business. RIL has been dominating the refining industry for the last 8-9 years since the launch of its second refinery at Jamnagar in Gujarat. They almost doubled the refining capacity to 60 million tonne per annum (MTPA) with the commissioning of the second refinery in December 2008. Though IOC surpassed the Ambani firm to become the largest refiner in the country last year--- after the commissioning of 15MTPA Paradip Refinery, RIL has been going strong with high gross refining margin (GRM)--- around $12 a barrel in the first quarter--- and generating humongous EBIT, over Rs 25,000 crore from refining business in the last financial year.

Essar always struggled to fight the mighty RIL since announcing the construction of its refinery project in 1995. Dhirubhai Ambani, who announced the refinery project at the same time, had completed it in July 1999, while Essar's refinery delayed till 2006. The expansion of Essar's refinery capacity to 18 MTPA from 10.5 MTPA took another 5-6 years. By the time, Ambanis built their second refinery expanding the capacity to 60 MTPA.

Fighting RIL will not be tough for Rosneft, which is the 51st largest company in the world with $65 billion in sales. In addition, it has the backing of the aggressive Russian government, which holds 50 per cent stake in the Moscow-based oil behemoth.

But what is going to be Rosneft's business in India? It is clear that they want to become a key player in the Indian petroleum market. With this target, they acquired the pan-India network of over 3,500 retail outlets of Essar, along with the 20 MTPA refinery in Vadinar. They also acquired the 58 million tonne Vadinar Port for importing cheap crude from countries including Venezuela. Market analysts expect that Rosneft may even look at creating additional capacity at Vadinar, where there is unused land available in the project. Rosneft will be the third global player after Royal Dutch Shell and BP to enter the Indian fuel retailing market. Also, Rosneft sees the India business as a starting point to expand in the Asia-Pacific region by supplying fuels to Indonesia, Vietnam, the Philippines and Australia.

Another change in India's petroleum map will be the growing influence of BP Plc, which made a big plunge by picking up 30 per cent stake in RIL's upstream assets at $7 billion in 2011. It had also formed a JV with RIL for marketing fuel in the country. The Rosneft-Essar deal will help BP Plc to increase its business interest in the region as it is the second largest share holder in the Russian firm with around 20 per cent stake after the Russian government.

The RIL-BP JV was a failure so far as it couldn't resolve the geological issues in KG D6, where gas evacuation plunged to one sixth of the peak production. The British giant had to write down its value of investment in KG D6 block by $790 million in 2014 besides another $830 million in impairment charges. RIL and BP announced in June this year that they would spend Rs 40,000 crore to recapture its lost position in the hydrocarbon exploration and production (E&P) in India. They target to produce 30-35 million cubic metres (1 billion cubic feet) of gas a day from KGD6 block, which consists of the R-Series, Satellites and D55, starting from 2022.

It's clear that Rosneft's entry will change the market dynamics.

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