Essar Wrap: A Word on Rosneft’s India Move

The news just dropped that Rosneft’s repeatedly delayed acquisition of Essar Oil, its massive refinery, its 2,700 filling stations, and the deep-water oil port of Vadinar has finally gone through. The Obama administration attempted to use Treasury’s Office of Foreign Assets Control (OFAC) and existing financial sanctions to scuttle the deal last August. Beyond that, much of the roughly $13 billion deal was Rosneft and partner Trafigura buying Essar Oil’s debt. Essar had hoped for an equal stake agreement between the two firms, but Essar’s poor debt gave Rosneft leverage to push for captive power and the port in the deal. As one might expect when CEO Igor Sechin has a financial edge, the deal wasn’t exactly friendly. It’s quite possible that the negotiating process and shutout of India’s firms will leave a poor taste in the mouths of India’s corporate leaders interested in acquiring Essar on the cheap, making the deal a classic Russian proposition: a tactical advance with a less clear strategic rationale or calculus.

It’s quite possible that the negotiating process and shutout of India’s firms will leave a poor taste in the mouths of India’s corporate leaders interested in acquiring Essar on the cheap, making the deal a classic Russian proposition: a tactical advance with a less clear strategic rationale or calculus.

Rosneft’s acquisition is big news for several reasons. First, Russia has historically struggled to sell oil to the Indian Ocean for the obvious reason that Gulf producers are right there. By acquiring a refinery in Gujarat at a capacity of about 400,000 barrels a day, Rosneft has a guaranteed entry point for oil supplies. It’s been suggested that Rosneft would source its Venezuelan production, perhaps less likely given political instability there now but a link between Russia’s foreign policy interests in the Caribbean and its Asian oil strategy. On top of that, the OPEC cuts have eaten at the margins for specific Gulf blends commonly traded in the region, giving Russian oil traders a more competitive look on the Indian market as prices for Russia’s Ural blend are too low to not draw interest. Furthermore, ONGC Videsh and other Indian firms have bought into Rosneft’s Vankor field, which is likely contributing to a rise in Russian oil exports to India. Finally, it gives Russia a deep-water port in a region fast becoming central to Russia’s foreign policy outlook. The Eurasian Economic Union is already pursuing free trade agreements with Iran and India and has just announced interest in reaching one with Pakistan. Russia isn’t a major infrastructure investor, but can use this port to broaden its commercial reach regionally.

Before getting ahead of ourselves, India’s Home Ministry and its Intelligence Bureau have red-flagged the acquisition of the port for security reasons. It’s relatively close to Pakistan, India has military installations in the region, and it will provide Russia a facility that could potentially be used for espionage activities. Despite the refinery deal, it’s still possible in the future with rising production in Iran or elsewhere that Russia’s oil simply won’t be competitive. The likeliest reason to prefer Russian oil supplies would be that East Siberian and Far East fields yield oil that burns cleaner, important for climate and health sensitive policies. Overall, it’s big news and a win for Rosneft and Russia in the region. But security fears and the bad blood over the deal may still derail the acquisition of the port.

Analysis by Nick Trickett

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