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Essar Still In Talks With Shell To Buy Three Refineries

THE WALL STREET JOURNAL

By Rakesh Sharma

Of DOW JONES NEWSWIRES

NEW DELHI (Dow Jones)–Essar Group is still in talks with Royal Dutch Shell PLC (RDSB.LN) on buying three refineries in Europe as it seeks to expand its refining capacity globally through acquisitions.

“Negotiations are going on with Shell,” Shashi Ruia, chairman of the diversified Indian conglomerate, said Thursday on the sidelines of a conference, declining to indicate when the talks would be completed.

Essar Group, which controls Essar Oil Ltd. (500134.BY), is in talks to acquire Shell’s Stanlow refinery in the U.K. and the Anglo-Dutch company’s Heide and Harburg plants in Germany.

Shell plans to sell about 15% of its global refining capacity, or about 600,000 barrels a day, in the next few years as part of a restructuring program aimed at improving profitability and efficiency.

Essar Oil, which currently operates a 210,000-barrel-a-day refinery on India’s west coast, has been looking at acquisitions as it aims to have a global refining capacity of 1 million barrels a day. It hasn’t given any time frame for the expansion.

In July, Essar acquired a 50% stake from Shell, Chevron Corp. (CVX) and BP PLC (BP) in the 80,000-barrel-a-day Mombasa-based Kenya Petroleum Refineries Ltd. The deal also gave Essar the right to sell oil products from its Indian refinery in east Africa.

India Expansion

Ruia also said Essar plans to expand its fuel retailing outlets in India to 2,500 from 1,450, which will help it sell its refined products.

“We’re going to immediately take it to 2,500 outlets…this financial year,” he said.

Essar is expanding its refinery at Vadinar in the western state of Gujarat to 720,000 barrels a day in two phases. The first phase, expected to be commissioned by March next year, will ramp up refining capacity to 360,000 barrels a day.

Private refiners Reliance Industries Ltd. (500325.BY) and Essar Oil Ltd. were forced to close all of their retail outlets in 2008 as soaring global crude oil prices, which rose above $147 a barrel in July 2008, made operations unviable.

Both retailers have now started reopening the closed outlets as crude oil prices have softened due to weak international demand stemming from the global financial crisis.

P. Raghavendran, Reliance Industries’ president in charge of refinery business, said in November the company was operating outlets at places where it could match the lower prices offered by state-run fuel retailers.

India’s state-run fuel retailers sell diesel, gasoline, kerosene and cooking gas at government-mandated prices which are usually at a discount to market prices to keep inflation in check. These companies, which incur revenue losses on discounted fuel sales, are compensated by the federal government through special oil bonds or cash and through discounts from state-run oil producers on crude oil sales.

However, Reliance and Essar don’t get any compensation from the government, which makes their retail fuel operations uncompetitive.

An oil panel set up by the federal government Wednesday suggested that gasoline and diesel prices be freed from state regulation but that the subsidy for kerosene and partial subsidy for liquefied petroleum gas should be maintained.

“Regulation will find equilibrium sometime,” Ruia said, when asked why Essar was expanding its retail fuel outlets.

-By Rakesh Sharma, Dow Jones Newswires; +91-11-4356-3334; [email protected]

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