GOA, India After two years of struggling under low crude prices and Western sanctions, Russia has made a major conquest, securing a sizable portion of India's oil market.
A consortium led by Russia's state-owned Rosneft on Oct. 15 announced it would acquire 98% of India's Essar Oil for over $10 billion. The deal with the debt-laden Essar group is structured to limit Rosneft's stake to 49%, circumventing the sanctions brought on by the Ukraine conflict. The other 49% will be held by Kesani Enterprises, which is owned by Switzerland-headquartered commodity trader Trafigura, and United Capital Partners, a Moscow-based private investment company.
India is the world's No. 3 oil importer. The acquisition includes the country's second-largest refinery, in the western state of Gujarat, and 2,700 gas stations nationwide. Official approval is expected by March 2017.
The consortium is to pay another $2 billion to acquire port facilities at Vadinar, in Gujarat.
The moves are in line with Moscow's efforts in "developing markets," Sergei Ryabkov, the country's deputy foreign minister, told the Nikkei Asian Review on the sidelines of the BRICS Summit, held in the southern Indian city of Goa on Oct. 15-16.
Ryabkov described current oil prices as unprofitable. As "a traditional producer," he said, Russia needs to cultivate "developing markets and to establish contacts, to find ways to deliver meaningful amounts of crude and oil products."
The deputy minister described the arrangement in India as a "win-win" for both sides.
CONTRACTING ECONOMY Russia is mired in a recession due to the oil plunge and a cash crunch, caused by the sanctions. Its economy contracted 3.7% in 2015, the first negative growth in six years, according to the International Monetary Fund. The IMF projects a 0.8% drop for 2016.
The world's second-largest oil exporter by value, and the largest supplier to Europe, depends heavily on oil and natural gas exports. In 2013, when the U.S. benchmark West Texas Intermediate was still trading at $90 to $110 a barrel, crude oil exports accounted for 8% of Russia's gross domestic product. Combined exports of crude oil and natural gas generated 11% of GDP.
The fall of commodities prices -- WTI plummeted to the $40 to $60 range -- has hit Russia hard. Its resource export value for 2015 was nearly cut in half, compared with two years earlier.
The India deal, though, makes Russia a key player in the fastest-growing major market. The South Asian country imports around 80% of its crude -- an amount valued at over $72 billion in 2015, according to United Nations trade data. Only China, at $134 billion, and the U.S., at $132 billion, spent more on oil imports.
Essar Oil has the capacity to refine around 400,000 barrels of crude per day, equivalent to 9% of India's total capacity.
Trafigura's trade volume is expected to get a boost as well, with one source putting the figure at 10%. Though the Swiss company itself declined to disclose how much it stands to gain, chief executive Jeremy Weir said in a statement that the deal "offers us a platform to extend our exposure" in India.
As one of the world's top three commodity trading houses, Trafigura also deals with liquefied petroleum gas, metals and ores. It handled 4 million barrels of oil per day during the six-month period ended March, up 46% on the year. Yet even with the surge in volume, its revenue for the period declined 9%, while profit plunged 10%.
A rough calculation tells us that for a total of about $13 billion, the consortium is set to control one-tenth of India's oil imports, worth approximately $6.5 billion a year. While low crude prices mean profits may be hard to come by, the deal could still make sense on a couple of levels: bumping up capacity utilization rates, and grabbing a slice of an energy market that is projected to double in the next 15 years.