India's Essar Oil to supply fuels to PetroChina after receiving Chinese loan

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 high.

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 statement added.

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.