Essar Oil to raise $5 bn for expansion

Mumbai: Essar Oil is in the process of raising a fresh debt of up to $5 billion through ECB and rupee loans to part finance its $6-billion Vadinar refinery expansion project.

Claiming that it has already received in-principle commitment from lenders to the extent of $4.3 billion, the company expects to wrap up the financial closure for the expansion project in the next few weeks.

The Ruias-promoted Essar Oil is planning to ramp up the capacity of its refinery at Vadinar from the present 10.5 million tonnes to 34 million tonnes by 2010, in expectation of continued surge in demand for petroleum products.

Mr Naresh Nayyar, Managing Director, said the capital infusion by the promoters would be to the extent of $2 billion in two tranches for the expansion project.

“The first tranche (of capital infusion by the promoters) of $1 billion will be made as soon as the financial closure is completed. The second tranche of $1 billion will be completed by the end of this year,” he told an analysts meet here on Friday.

Stating that the debt-equity ratio will be within 1:3, he said the current financing structure provided adequate flexibility for future requirements and growth capital.

The company’s Vadinar refinery, which commenced commercial production from May 1, 2008, can produce about two million tonnes above the rated capacity, with the production in this month reaching one million tonnes.

Essar Oil plans to ramp up the capacity through a two-pronged approach. In the first train, the existing refinery capacity of 10.5 million tonnes will be raised to 16 million tonnes through revamps, modifications and additions of some process units.

A second train will be launched to produce 18 million tonnes, with similar units being repeated. “And both the trains will be integrated to give us added flexibility,” Mr Nayyar said.

Overall, Essar Oil plans to process one million barrels a day from the existing level of 2.1 lakh barrels a day, including through some overseas acquisition of refining facilities in the next three to four years.

With the refinery expansion to 34 million tonnes, the processing capacity will increase to 7 lakh barrels a day.

“To achieve our balance targeted capacity of processing 3 lakh barrels a day, we will be looking for overseas acquisition in the next three to four years,” the company’s MD said.

Replying to a question, he said due to price anomalies in the domestic market, the company was not having any significant retail sales, even though it has a network of about 1,250 retail outlets, out of which less than 100 are operations.

“Our retail pricing structure is an average Rs 7 to Rs 8 more a litre as compared with the prices of the oil PSUs. Existing government subsidies for transportation fuels are unfavourable for development of retail marketing. We are now selling our products to the oil marketing companies, according to the refinery transfer price policy,” he said.

Even after the expansion, the company will continue to sell about 65 per cent of its production in the domestic market. It is estimated that the domestic refining capacity would increase to 250 million tonnes by 2011-12, out of which some of the new private sector refineries are SEZ based and hence will be exporting their products.

“The domestic demand by that year is expected to touch 160 million tonnes and hence we feel that selling in the domestic market is economically beneficial,” he pointed out.

Stating that the expansion project was on track, he said about 75 per cent of the equipment needed for the project would be ordered before June 2008.