India's Essar Soon to Achieve Financial Closure of Vadinar Refinery Expansion Phase I

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Researched by Industrial Info Resources (Sugar Land, Texas)--India's leading oil and gas company, Essar Oil limited (BSE:500134) (Jamnagar, Gujarat) has raised $920 million to finance the expansion of the company's refinery in Vadinar, Gujarat, from the existing capacity of 10.5 million tons per year to 16 million tons per year. The refinery is already functioning at a capacity of nearly 14 million tons per year, which is 133% of its design capacity. Essar Oil CEO, Naresh Nayyar, said that the loan has been approved by ICICI Bank Limited (BSE:532174) (Mumbai), IDBI Bank Limited (BSE:500116) (Mumbai), and State Bank of India (BSE:500112) (Mumbai). With the signing of the loan agreements in August 2009, financial closure for the expansion project will be achieved.

Nayyar said the expansion to 16 million tons per year was part of Phase I of the company's expansion plans. The project will require an investment of about $1.6 billion, of which nearly $415 million will be raised through equity, $251 million through internal accruals, and the rest through debt. About 35% of the mechanical works are already complete, and the remainder is scheduled for completion by December 2010.

Phase II of the refinery's expansion plan will increase the refining capacity of the facility to 34 million tons per year with the addition of a new 18-million-ton-per-year processing unit. Phase II will involve an investment of about $4.4 billion, and financial closure is expected to be completed in the last two quarters of the current fiscal year, 2009-10. Phase II is slated for completion by December 2011. While Phase I involves only rupee loans, Phase II may see a foreign loan of about $700 million.

With the completion of the expansion project, the Vadinar refinery complex will no longer produce low-value fuel oil. In addition, the Nelson Complexity of the facility will increase to 12.8, signifying the ability of the refinery to process tougher crudes and produce higher quality petroleum products that will meet Euro V standards. The products currently produced are aviation turbine fuel, high-speed diesel, kerosene oil, liquefied petroleum gas (LPG) and transportation fuels that meet Euro III and Euro IV product specifications.

Products from the expanded refinery are also expected to be used as feedstock for the naphtha cracker plant that Essar intends to set up at the Vadinar complex. The petrochemical complex housing the cracker unit will produce several polymers, chemicals and important intermediates.

In December 2008, Essar Oil announced the intention of investing approximately $140 million during the next four years to explore the company's oil and gas assets overseas. The firm proposes to invest about $60 million in its offshore natural gas block located in the Song Hong Basin in Vietnam. The 5,925-square-kilometer block is estimated to have natural gas reserves of 2 trillion-3 trillion cubic feet. The block was awarded to Essar Oil's subsidiary, Essar Exploration and Production Limited (EEPL) (Mauritius), during a licensing round in March 2008. Essar Oil proposes to spend another $65 million on its two shallow-water blocks located in the Bonaparte Basin of North Australia. EEPL won the license to the two blocks in November 2008. The exploration phase of these two blocks will last for five years. Under the contract, Essar is permitted to transport oil and gas from the Australian blocks to India. The company plans to raise funds for these ventures by divesting some of its stake in all three blocks. Indian public sector companies, including Oil India Limited (OIL) (New Delhi), have been informed of the offer.

Another $15 million will be spent looking for oil and gas in three onshore blocks in the Morondava Basin of Madagascar. The blocks cover an area of 30,000 square kilometers and are estimated to have in situ oil reserves of about 1 billion barrels. Essar intends to begin drilling operations very soon.

Among the participating interests owned by Essar's Exploration and Production business in India are a block in Mehsana, Gujarat, the Ratna and R-Series blocks in Bombay High on the Arabian Sea off the Mumbai coast, two blocks in Assam and a coal-bed methane block in Raniganj, West Bengal. Other Exploration and Production assets owned by the firm overseas include an offshore block in Nigeria.

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