Essar Energy hopes Stanlow purchase will open up UK retail market

Essar Energy has said that its $350 million acquisition of Shell’s oil refinery at Stanlow in the UK, will help it export the products of its India refinery to the UK market.

The Stanlow refinery, whose acquisition was completed today, is the second largest refinery in the UK and supplies approximately one sixth of the UK’s petrol. It has a total capacity of 296,000 barrels of oil a day.

“The acquisition of the Stanlow refinery gives Essar Energy direct access to the UK market. It is also aligned with Essar Energy’s strategy to provide options for the export of high value fuel products from its refinery at Vadinar, in Gujarat state, India,” the Indian company, listed on the London Stock Exchange, said.

Vadinar currently has a capacity of 300,000 barrels a day and is slated to be increased to 375,000 bpd by the end of this year, and to 405,000bpd by September 2012.

It shall pay around $175 million for the refinery upfront and an equal amount on the date of the first anniversary of completion.

A separate payment of $916 million has been made to Shell for the stock of crude oil, refined products and certain other inventory items on the Stanlow refinery site, Essar Energy said.

Essar has been focused on trying to sell its petrol and diesel to foreign markets, partly because the home market of India has a ‘controlled price’ regime imposed by the Indian government. Together with the nearly 100% taxes, the price ceiling makes it difficult, if not impossible, for private companies to sell refinery products to Indian consumers.

Since most countries give out distribution licenses only for those with production facilities, Indian companies sometimes make acquisitions primarily as an entry point for the market, rather than for the asset itself.

Essar had earlier acquired a substantial stake in Kenya’s only refinery in Mombasa in 2009.

Essar Energy was created by pooling together the energy-related (mostly oil and gas and some power generation units) of the Essar Group of India. The Essar group, controlled by billionaires Shashi and Ravi Ruia (S-R), is one of India’s most influential and was a partner to the Vodafone in India.

It is in the process of selling its one-third stake in Vodafone Essar to the UK company for around $5 billion.