Essar buy gives Rosneft edge in Asian oil market

The acquisition of Essar Oil by Russian oil major Rosneft and Trafigura-UCP combine is more than a commercial deal between the two companies.

Essar Oil's refinery and the oil terminal at Vadinar in Gujarat will give Russia's state-owned major a strategic place in the Asian oil market which is expanding rapidly, strengthening President Vladamir Putin's foreign policy influence by controlling crucial oil assets.

The deal, signed when Putin came to Goa for the Brics Summit last year, was not just an agreement between the two companies. It has heavy political overtones that are hard to miss.

Despite the Intelligence Bureau flagging off concerns of Russian port being close to the military installations in India and being in proximity to the India-Pak border did not deter the Indian government.

For long, Russia had dreams of selling oil to the Indian sub-continent, a market captured by the gulf producers. This deal has brought in that elusive market that is highly price-sensitive, where demand is far from being saturated.

Rosneft's chief executive officer Igor Sechin said after the deal was concluded on Monday, "The global hydrocarbon market conditions remain unstable with high crude oil and oil product pricing volatility. In such conditions, the company keeps focusing on further operating efficiency improvement, including on the maximisation of the existing assets synergy on the domestic and international markets."

The Vadinar refinery creates unique opportunities for synergies with existing Rosneft-owned assets and will help improve the efficiency of supply to other countries within the region, he added.

Rosneft, headquartered in Moscow's Balchug district near the Kremlin, across the river Moskva, is readying itself to enter India both in the upstream and downstream segments of the business. It will have to face the tough competition from the state-owned Indian Oil Corporation (IOC), which has an installed capacity of 81 million tonne per annum. IOC also owns 11 of the 23 refineries in the country and the largest number of retail outlets - over 32,000 across the country. The state-owned public sector undertakings -- IOC, BPCL and ONGC (which is merging with HPCL) will jointly control more than 90% of the retail outlets with private players having the rest.

In comparison, the Vadinar refinery has a capacity of 20 million tonne per annum. The largest private player in the country, Reliance Industries Ltd (RIL) operates the world's biggest oil refinery complex in Jamnagar with a capacity of 1.24 million barrels per day. On its part, Rosneft wants to double its retail outlet network immediately from the existing 3,000 outlets that it inherits from the deal.

"The Russian-owned Rosneft, which gets to own a refinery with a capacity to produce 40,000 barrels of oil a day, also gets to own a deep-water port in a region fast becoming central to Russia's foreign policy outlook as well," Nick Trickett wrote in the Bear Market Blog of the Foreign Policy Institute.

Rosneft, Russian's biggest tax payer, is getting a critical access into the growing Asian market, particularly to the downstream oil industry, which is expected to grow exponentially.

But having more players, hotting up competition is the need for India where import dependency on crude is rising as the switch to non-renewable energy is taking longer than expected.

An India Ratings report said crude oil production grew 83.8% during May 2017 aided by higher production by ONGC and Oil India Ltd. Notwithstanding higher domestic crude oil production, import of crude also grew during the period on account of higher domestic consumption, which rose 6% over the previous month and grew by 5.3% over the previous year resulting in higher import dependency for crude oil which was 83.8% of imports in May 2017.

ENERGY TIES

• For long, Russia had dreams of selling oil to the Indian sub-continent
   
• This deal gives it entry in a highly price-sensitive market