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Essar may seal refinery deal with Shell in a month

Business Standard

Kalpana Pathak / Mumbai November 25, 2009, 0:58 IST

Ruias-promoted Essar Oil is likely to seal the deal with Royal Dutch Shell to buy its three refineries — two in Gemany and one in the UK — in over a month’s time, sources close to the development said.

“Both the companies have reached consensus on several issues regarding the deal and supply and product offtake agreements have been signed. Essar will supply products to Shell from the refinery after the takeover,” said a source close to the development. He, however, refused to divulge the financial details of the deal saying negotiations were underway on that front.

When contacted, Essar Oil spokesperson said, “We are in exclusive discussions with Shell. It is not our policy to comment on our negotiations and timelines.”

Essar Oil had last month entered into exclusive talks with Shell to buy its Heide and Harburg refineries in Germany and the Stanlow plant in the UK. Refining capacities of these refineries is pegged at around 5,00,000 a barrel per day.

Shell is reviewing the future of its refineries worldwide as it seeks to reduce costs and cut spending after the global recession curbed demand for fuels and dragged down prices. Declining profit margins have prompted refiners to idle plants, seek the sale of others and slow operating rates. The company plans to sell about 15 percent of its global refining capacity, or about 600,000 barrels a day of capacity, in the next three years as part of its restructuring programme aimed at increasing profitability and efficiency. It agreed in September to sell its fuel and lubricant businesses in Greece.

Analysts, however, say that with Essar having already slated a big expansion ahead of itself, it needs to be watched how the company plans to raise funds to facilitate its expansion plans.

A senior Essar Oil official had told Business Standard this May that the company could look at offloading stake in future to fund its expansion plans.

The company had during an analyst meet this May said that it is in a comfortable position to fund its expansions. “But the internal accruals don’t seem supportive of its expansion plans at this moment. Fund management is something to watch out for,” said an analyst from a Mumbai-based broking house.

Essar Oil is more than tripling its refining capacity from current 10.5MMTPA to 34MMTPA.

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