Oil wars: How Krem­lin $13 bn In­dian deal al­most fell apart

Kuwait Times - - BUSINESS -

LON­DON: A multi-bil­lion-dol­lar Rus­sian deal to buy In­dian re­finer Es­sar was nearly sunk at the eleventh hour by a ri­val bid from Saudi Ara­bia as the two oil su­per­pow­ers vie for supremacy across the world. The deal be­tween Es­sar and a con­sor­tium led by Krem­lin oil gi­ant Ros­neft ap­peared dead in the wa­ter two months ago after Saudi state en­ergy firm Aramco weighed in, ac­cord­ing to seven Rus­sia, In­dia and Saudi-based in­dus­try sources fa­mil­iar with or in­volved in the ne­go­ti­a­tions.

It was sal­vaged due to the in­volve­ment of Rus­sian Pres­i­dent Vladimir Putin and In­dian Prime Min­is­ter Naren­dra Modi, who were keen for it go through, and after the con­sor­tium agreed to pay $13 bil­lion - more than dou­ble what Ros­neft had ini­tially val­ued Es­sar at, sources said. This made the re­finer the big­gest-ever for­eign ac­qui­si­tion in In­dia and Rus­sia’s largest out­bound deal.

The tus­sle for Es­sar - a state-of-the-art plant in the world’s fastest-grow­ing fuel mar­ket - il­lus­trates the grow­ing bat­tle for oil mar­kets be­tween Rus­sia and Saudi Ara­bia, the world’s two largest crude ex­porters. It also sheds light on the chal­lenges OPEC mem­ber Saudi Ara­bia and non-OPEC Rus­sia - which are also fight­ing a proxy con­flict in Syria’s civil war - will face in try­ing to clinch a global agree­ment to limit out­put growth to prop up oil prices. The full de­tails of how the Es­sar deal was struck re­main un­clear. Two in­dus­try sources said it was res­cued thanks to the in­volve­ment of Putin and Modi while three other sources said Ros­neft had sim­ply out­bid Saudi Aramco.

Of­fi­cials in Modi’s of­fice de­clined to comment while Putin’s spokesman Dmitry Peskov de­nied there was any Krem­lin in­ter­ven­tion in the deal. “Nat­u­rally, we de­fend the in­ter­ests of our com­pa­nies. Of course we lobby for them, es­pe­cially on such large deals,” said Peskov, but added that in the case of Es­sar “there were no or­ders from the Krem­lin”. “It was a cor­po­rate de­ci­sion by Ros­neft to gain syn­er­gies via co­op­er­a­tion with In­dia,” he said. Ros­neft and Saudi Aramco de­clined to comment. Es­sar said it had held dis­cus­sions with sev­eral po­ten­tial buy­ers but had gone with the Ros­neft con­sor­tium be­cause their of­fer was con­sid­ered the most at­trac­tive. It de­nied there was any in­ter­ven­tion from Putin or Modi.

Ros­neft boss Igor Sechin is keen to buy refin­ing as­sets around the world to guar­an­tee out­lets for Rus­sian oil. He had been ne­go­ti­at­ing since 2014 to buy 49 per­cent of Es­sar from its own­ers, In­dian brothers Ravi and Shashi Ruia, and the two par­ties had been in ex­clu­sive talks since July 2015 when a pre­lim­i­nary deal was signed. While the ex­act amount Ros­neft was pre­pared to of­fer for the stake at that stage is un­clear, Rus­sian and In­dian in­dus­try sources said it val­ued the whole of Es­sar at about $5.7 bil­lion.

How­ever it be­came ap­par­ent that there were prob­lems with the deal in early Septem­ber, when Sechin trav­elled to In­dia to meet the Ruia brothers, fly­ing from Hangzhou, China, where he had been part of Putin’s G20 sum­mit del­e­ga­tion. Sechin walked into the meet­ing with the Ruia brothers soon after land­ing in In­dia at 1 a.m., de­ter­mined to close the deal, ac­cord­ing to sources briefed on the dis­cus­sions.

As the meet­ing started, one of the brothers told Sechin the deal process had been go­ing on for too long, the ex­clu­siv­ity pe­riod had ex­pired in July and Es­sar was now talk­ing to other par­ties. Those other par­ties in­cluded Saudi Aramco, he said. Ac­cord­ing to the sources fa­mil­iar with how the meet­ing un­folded, Sechin re­sponded by say­ing that if Es­sar walked away from the deal it risked los­ing Rus­sian fi­nan­cial and oil-sup­ply sup­port. The Ruia brothers then said the talks with Ros­neft were over and called an abrupt end to the meet­ing.

“Peo­ple started leav­ing the room, em­bar­rassed,” one of the sources said. An­other source said the Es­sar man­age­ment had drafted a state­ment to say the deal with Ros­neft was off. Ros­neft and Es­sar de­clined to comment on what tran­spired at the meet­ing, or on whether such a state­ment had ex­isted. Sechin and the Ruia brothers could not be reached for comment. Three Saudi-based sources fa­mil­iar with de­tails of talks be­tween Es­sar and Saudi Aramco said the firm was se­ri­ously con­sid­er­ing buy­ing Es­sar. One of the sources said Aramco was pre­pared to pay up to $9 bil­lion for all or most of the re­finer. Aramco de­clined to comment on whether it had made a bid.

Too big to fail

In the end, how­ever, the Ros­neft-Es­sar deal proved to be too big to fail. For In­dia, a deal col­lapse or a de­lay be­cause of talks with an­other party would set back Modi’s drive to clean up In­dia’s $140 bil­lion moun­tain of bad debt given Es­sar’s multi-bil­lion­dol­lar debts to lo­cal and for­eign banks after years of rapid ex­pan­sion. For Rus­sia, the deal in the huge In­dian mar­ket rep­re­sented an im­por­tant mile­stone in build­ing a global oil em­pire de­spite West­ern sanc­tions im­posed on Rus­sia over its ac­tions in Ukraine. Fac­ing the Saudi competition, Ros­neft formed a con­sor­tium that bought 98 per cent of the re­finer plus a fuel ter­mi­nal for $13 bil­lion. The Krem­lin oil firm bought 49 per­cent - be­low the 50 per­cent level that would have fallen foul of West­ern sanc­tions - with Swiss trad­ing house Trafigura and Rus­sian pri­vate in­vest­ment group UCP buy­ing the other 49 per­cent.

Ac­cord­ing to the In­dian and Rus­sian in­dus­try sources, Ros­neft and Es­sar re­turned to the ne­go­ti­at­ing ta­ble within days of the spat in early Septem­ber, and the deal was fi­nally struck. One of the sources said there was a fierce bat­tle be­tween Es­sar and Ros­neft over the terms. They said the Rus­sian-led con­sor­tium was forced to out­bid the Saudi of­fer, which they said com­prised a com­bi­na­tion of cash, long-term low in­ter­est credit and oil sup­plies. Trafigura de­clined to comment on how the deal came to­gether, while UCP did not re­ply to a writ­ten re­quest ask­ing for comment. Wash­ing­ton said the deal did not vi­o­late sanc­tions.

ZELIENOPLE: A crew works on a gas drilling rig at a well site for shale based nat­u­ral gas in Zelienople, Pa.

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