Russian Mega India Deal Takes Oil Battle to Mideast Backyard

(Bloomberg) -- A $13 billion deal involving Russia in India threatens to weaken the grip of Middle East crude suppliers in the world’s fastest growing oil market.

Rosneft PJSC is part of a group of investors that beat suitors from Saudi Arabia and Iran to buy Essar Oil Ltd.’s Vadinar refinery, India’s second-biggest, in a deal announced over the weekend. Russia’s largest oil producer is following a strategy by resource-rich firms and nations to secure outlets for their output, and may supply the facility with Venezuela crude and challenge Middle East exporters that provide about two-thirds of the country’s imports.

“India will be the most important product-growth market over the next 25 years, making it important to Russia,” according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

With the Essar deal, Rosneft is targeting a market of 1.3 billion people that imports more than 80 percent of its crude requirements and which is forecast by the International Energy Agency to be the world’s fastest-growing oil consuming nation through 2040. The country has emerged as a bright spot for global demand as the quickest economic expansion among major economies spurs increased use of trucks, cars and motorbikes.

Rosneft on Monday fell 2.2 percent to 346 rubles as of 12:58 p.m. in Moscow. Essar Oil shares were delisted last year.

Market Access

The transaction also includes about 2,700 Essar Oil retail stations, a market that has attracted top oil companies such Royal Dutch Shell Plc and BP Plc. Most of Essar’s output is sold domestically, either through its own outlets or to government-owned fuel retailers.

“The access to the Indian market attracted Rosneft the most,” Prashant Ruia, chairman of Essar Oil, said in an interview in Mumbai on Sunday. “It is one of the world’s largest markets. They wanted to have a piece of the market.”

Rosneft also sees the potential to expand in the Asia-Pacific region by supplying fuels to Indonesia, Vietnam, the Philippines and Australia, it said in a statement.

The deal will enable Russia to have “greater influence over the Asian market,” said Abhishek Kumar, an analyst at InterfaxEnergy’s Global Gas Analytics in London. “This would be in response to Saudi Arabia’s attempts to penetrate the European market, which is dominated by Russian oil.”

Venezuelan Crude

The need for oil-rich nations to invest in overseas refineries to secure market share has intensified amid a global glut. Saudi Arabia is buying stakes in refiners through its state-owned oil giant Saudi Aramco in countries from Indonesia to the U.S. Kuwait is also investing in processing facilities.

Essar Oil’s Vadinar refinery in the western state of Gujarat can process about 400,000 barrels a day. It was designed to run on low-quality crudes from Venezuelan or the Middle East, rather than Russian grades. Venezuela made up almost half the refinery’s supplies in the first six months of the year, followed by Iran, according to shipping data obtained by Bloomberg.

“The best way for Rosneft to supply crude to Essar is via its equity in Venezuela,” said Tushar Tarun Bansal, director at Ivy Global Energy, an industry consultant in Singapore. “Bringing this crude to India helps Rosneft and Russia the most by securing their equity crude supply and not adversely impacting its own market in Europe.”

By comparison, Middle East exporters led by Iraq and Saudi Arabia provided more than 65 percent of India’s overall crude imports during the April-June quarter, according to Oil Minister Dharmendra Pradhan.

Strategic Deals

Rosneft and Petroleos de Venezuela SA, the state oil company, agreed earlier this year to terms on swapping crude oil and fuels. The Russian oil giant also has interests in five projects in Venezuela -- Petromonagas, Petrovictoria, Petromiranda, Boqueron and Petroperija -- that contain estimated oil reserves that exceed 20.5 billion tons (about 150 billion barrels), the company said in February.

India has been deepening its energy ties with Russia, which has also developed nuclear reactors in the South Asian nation and has discussed increasing supplies of natural gas through both LNG and pipelines. Indian state-owned companies have so far spent almost $6 billion for new stakes in Russian oil assets in Siberia.

After letting India companies invest in Russian exploration and production projects, “India is reciprocating by allowing Russian oil major Rosneft to invest in refining in India,” said Bernstein’s Beveridge. “These agreements are very strategic, aimed at boosting India’s energy security and boosting Russia’s access to the most important long term growth market.”

--With assistance from Dhwani Pandya To contact the reporters on this story: Debjit Chakraborty in New Delhi at dchakrabor10@bloomberg.net, Saket Sundria in Mumbai at ssundria@bloomberg.net. To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Pratish Narayanan