By SAURABH CHATURVEDI
NEW DELHI -- Essar Oil will likely sign an initial agreement
with a Chinese bank for a $1 billion loan as part of the Indian company's efforts to tap
overseas funds to refinance expensive local debt, a person with
direct knowledge of the matter said.
The likely deal with China Development Bank will be
supported by an agreement to supply fuel products from Essar's
refinery to PetroChina, said the
person who asked not to be named.
"The amount will be a kind of an advance payment for fuel
product exports," the person said. This will be an initial
agreement and details will be worked out later.
In a statement, the Essar group said it has been in
discussions with several international banks, including Chinese
banks, to replace its local debt. "China Development Bank is
part of that conversation," it added.
Essar Oil, a unit of Essar Energy, plans to raise $1.8
billion through overseas loans and bonds over the next three to
six months in an effort to cut by half its average interest
burden of 11.5% on domestic debt.
Interest costs are high in India because of the steep rate
increases made by the central bank to control inflation. The
Reserve Bank of India (RBI) increased its policy lending rate
by 3.75% points between March 2010 and October 2011. Easing
inflation has allowed it room to unwind some of those rate
increases, it lowered the rate by 1.25% point starting April
last year, but still local interest rates are considered
Cheaper loans in China are attractive for Indian companies.
In October 2010, Reliance Power got a commitment of $12 billion
of loans from Chinese banks after it ordered power equipment
and services from Shanghai Electric Group.
Essar Oil is India's second largest private refiner. Its refinery at Vadinar in western India can process 405,000 bbl per
day of crude oil after a recent expansion.
It may also look to source crude from Latin America through
PetroChina to part feed the refinery.
"After our expansion, we have been sourcing a
significant portion of our crude from Latin America with a view
to meet our increased requirement of ultra-heavy crudes.
PetroChina is a strong player in this region and will thus
continue to be an important trade counter party for us," the
The company is looking for new sources for crude oil as
Western sanctions against top supplier Iran over its alleged
nuclear weapons program have made imports from the Middle
Eastern country difficult.
Dow Jones Newswires