Essar Oil Deal: US$12.9 billion deal (India’s Largest FDI)
Essar forayed into the oil & gas sector after it found success in contract drilling. Around the mid-1980s, the Indian Government opened up the contract drilling business to Indian private companies. Essar was among the first private companies to grab the opportunity and become India’s largest rig operator in the private sector, with a fleet of 11 land rigs, one offshore rig and a drill ship.
In 1994, Essar started work on a refinery at Vadinar in Gujarat’s Jamnagar district. By 1995, the necessary funding was in place after Essar Oil Limited, a company that was instituted in 1989, floated a successful public issue to support the refinery project. Work on the refinery was progressing as per schedule until the first quarter of 1998. In the second quarter, a devastating cyclone hit the western coast of India damaging several structures in the refinery site, leading to stoppage of work.
It was not until early 2005 that Essar restructured the balance sheet and work resumed with renewed vigour on completing the refinery project. During the period of stoppage, Essar had wisely planned for technology upgrades. Within 18 months after work resumed, Essar began commissioning the refinery in phases. Trial production was initiated and by 2008, the Vadinar refinery started commercial production with an initial capacity of 10 million tonnes.
For the next five years, Essar operated the refinery at more than 100 percent capacity utilisation. In 2013, Essar Oil undertook an extremely capital-intensive project to double the capacity to 20 million tonnes. The company also made vital upgrades to enhance the unit’s complexity from 6.1 to 11.8, which would make the refinery among the most complex refineries in the world with the ability to process the toughest crudes.
In 2015, the holding company of Essar Oil made a delisting offer to the minority shareholders of the Company, which became the largest privatisation bid in the history of corporate India with over Rs 3,955 crore paid to the shareholders who received more than 100 percent premium on the floor price.
In 2016, Essar signed a definitive agreement to monetise 98% stake in Essar Oil Ltd by selling 49% each to the Russian oil giant Rosneft and a consortium led by Trafigura and UCP. It was in 2017, that this transaction was concluded with Essar Oil being valued at $12.9 billion. This is not only Russia’s largest investment in India, but also the country’s largest FDI in the energy sector.
The deal included Essar Oil’s 20 MTPA Vadinar Refinery, its pan-India network of over 3,500 retail outlets (representing India’s largest private sector retail network), as well as the associated refinery infrastructure. The transaction perimeter also included the Vadinar Port (capacity of 58 million tonnes with world-class dispatch and storage facilities for liquid cargo) and the Vadinar power plant (a 1,010 MW state-of-the art, multi-fuel unit that supplies both power and steam to the Vadinar refinery).
Essar Oil is yet another testimony to Essar’s capability of incubating world-class businesses, operating them and monetising at a premium valuation.
*Essar Oil Limited and its subsidiaries are financially and legally independent from Essar. Essar Oil Limited is currently known as Nayara Energy Limited.