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Bloomberg: Essar to Raise $4 Billion to Triple Refining Output (Update2)

By Archana Chaudhary

Dec. 18 (Bloomberg) — Essar Oil Ltd., operator of India’s newest refinery, plans to raise $4 billion, half of it overseas, to more than triple capacity at the facility.

The funding plan will be completed next month, Naresh Nayyar, managing director, said in an interview in Mumbai. Shareholders will vote today to sell $2 billion of shares to the group, controlled by billionaires Shashi and Ravi Ruia, to fund the remainder of the Gujarat, western India-based plant.

Essar, whose shares have risen about five-fold this year, needs the funds to compete with Reliance Industries Ltd., which is using record profits to build the world’s biggest refinery complex. The Indian refiners are reliant on exports because state-set retail prices make it impossible to profit from selling gasoline, diesel and heating oil at home.

“It will be hugely ambitious to grow as big as that by 2010,” said Tony Regan, energy consultant at Nexant Inc. in Singapore. “From 2009 we’ll see significant volumes coming up, mostly from Reliance. So we’re expecting refining margins to come off quite sharply.”

Shares rose 4.5 rupees, or 1.8 percent, to 260.5 rupees at 11:20 a.m. local time on the Bombay Stock Exchange today. They earlier rose as much as 6.6 percent.

“By mid-2009, we should have in hand all the equipment needed to run the refinery at full scale,” Nayyar said yesterday, without saying whether Essar will sell bonds or obtain loans. “We’ve already placed orders for all critical items.”

Increasing Capacity

Construction by Essar, Reliance and Indian Oil Corp. will increase India’s ability to process crude by 92 million metric tons a year by 2012 from 149 million tons now, boosting exports, Dinsha Patel, junior minister for oil and gas, said Aug. 16.

India had a surplus of 20.1 million tons of fuels in the year ended March 31, of which diesel accounted for more than half.

“We were aware of the tightness in the equipment market thanks to all the expansion plans by Asian refiners,” Nayyar said. The company has ordered all equipment that it needs up to 24 months for delivery, he said.

The Mumbai-based group has about $2 billion of debt outstanding, he said.

Capacity at Essar Oil’s western India-based refinery will increase to 34 million tons a year, or 680,000 barrels a day, from 10.5 million tons now.

Reliance Petroleum Ltd., a unit of Reliance Industries, is building a 580,000 barrel-a-day refinery adjacent to a 660,000 barrel-a-day plant owned by its parent. The plant is expected to be ready next year.

Indian Oil

Indian Oil, the nation’s biggest state-run refiner, and third-ranked Bharat Petroleum Corp. are also planning expansions.

Essar has placed orders to buy heavier varieties of crude oil from the Middle East, Nayyar said without elaborating. The company also plans to buy sour crude varieties from Mexico, Brazil and Venezuela.

“Our goal is to process 1 million barrels crude a day, of which 700,000 barrels a day will be processed in Jamnagar,” Nayyar said. The company plans to build or buy overseas refining capacity of up to 250,000 barrels a day.

Essar plans to sell 80 percent of the fuels processed at its refinery in overseas markets. The company plans to market gasoline and diesel from its Jamnagar refinery in Southeast Asia including China and Middle East, he said without elaborating.

East Africa

“Though the demand isn’t huge now, marketing in east African countries will make economic sense for us,” Nayyar said. Essar is looking to buy stake in fuel retailing companies in African countries such as Kenya, Tanzania and Nairobi, he said.

Nayyar declined comment on reports the company is planning to buy 50 percent stake in a Kenyan refinery. Essar plans to buy a 50 percent stake currently owned by Chevron Corp., Royal Dutch Shell Plc and BP Plc, Press Trust of India reported on Dec. 10.

Essar Oil will bid for rights to explore oil and gas areas offered by the Indian government on Dec. 13, Nayyar said. The country offered a record 57 areas last week.

The Indian government expects companies to invest $3.5 billion in areas they secure in the auction, M.S. Srinivasan, secretary to India’s oil ministry said on Dec. 13. The previous six rounds had drawn cumulative investments worth $8 billion.

The company may look for partners to jointly bid for areas auctioned, Nayyar said.

To contact the reporter on this story: Archana Chaudhary in Mumbai at [email protected] .

Last Updated: December 18, 2007 01:10 EST

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