Essar Energy, Unit May Raise $3 Billion for U.K., India Projects

Essar Energy Plc (ESSR) and unit Essar Oil Ltd. (ESOIL) may raise as much as a combined $3 billion to fund the purchase of oil stockpiles in the U.K. and expand refining projects in India, an official said.

Essar Energy may raise as much as $1.5 billion in debt to buy crude oil and fuel stockpiles at the refinery in Stanlow, which it acquired from Royal Dutch Shell Plc (RDSA), Chief Executive Officer Naresh Nayyar said on a conference call yesterday. The borrowing will depend on the value of the stockpiles, he said.

Mumbai-based Essar Oil’s board has approved raising as much as $1.5 billion in foreign currency debt to fund ongoing projects, said Nayyar, who is also managing director of the company.

“There are two different loans and have two different purposes,” Nayyar said. “There’s an arbitrage opportunity in raising foreign currency debt and we hope to take advantage of that.”

India’s central bank has raised key borrowing costs 10 times since March 2010. The 7.5 percent benchmark interest rate is the highest among Asia’s biggest economies, as India’s policy makers seek to curb accelerating inflation.

Essar Oil is increasing the capacity of its refinery at Vadinar in India’s Gujarat state by 43 percent to 20 million metric tons a year by September 2012 at a cost of $1.8 billion, Nayyar said.

“Completing the refinery expansion on time is important as it will help Essar improve margins significantly,” said Alex Mathews, head of research at Geojit BNP Paribas Financial Services Ltd. in Kochi. “The refinery in the U.K. will give the group access to new markets.”

Heavy Crude

The expanded refinery will allow Essar Oil to process heavier grades of crude oil, which are cheaper than lighter varieties, and help improve margins, Nayyar said.

Essar Energy said in February it would buy Shell’s Stanlow refinery for $350 million. The refinery’s oil stocks were valued at around $900 million on July 4.

Essar Oil declined 0.9 percent to 127.60 rupees in Mumbai trading yesterday compared with a 0.7 percent drop in the benchmark Sensitive Index.

Essar Oil posted a net income of 4.69 billion rupees ($105 million) in the three months ended June 30, compared with a 700 million-rupee loss a year earlier, according to an e-mailed statement yesterday. The company earned $7.38 on every barrel of crude turned into fuels in the quarter, compared with $5.79 a barrel a year earlier.

Essar plans to complete the first phase of expansion at its Vadinar refinery to 18 million tons by September and operate it at full capacity by the first quarter of 2012, Nayyar said.

Separately, Essar Oil’s board approved a proposal to seek shareholder revalidation for an enabling resolution to raise as much as $2 billion through the sale of securities, the company said in a statement to the Bombay Stock Exchange yesterday.

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net.

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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