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India’s refiner Essar Oil—in which Russian state-controlled oil firm Rosneft holds 49 percent—is looking to raise more than US$1 billion in pre-finance loans from oil trading firms, after Western banks have been reluctant to lend money to the Indian company partly owned by Russia’s biggest oil company that is subject to U.S. sanctions.
According to banking and trading sources familiar with the talks who spoke to Reuters, Essar Oil will be seeking the pre-payment loans from oil traders in exchange for repaying them with refined oil products in three to four years, as the Indian refiner wants to diversify its creditor base and not rely too much on Indian lenders for financing.
Western banks are not explicitly banned from extending funding to Essar Oil, as the sanctions stipulate that Rosneft’s majority-owned entities are subject to sanctions, while its 49-percent stake is just shy of the majority interest in Essar. Nevertheless, banks are cautious and wary of the Russian link, banking sources told Reuters.
“Essar and Rosneft initially signaled interest in borrowing but have gone silent in the past six months after most banks signaled to them they would not be able to lend,” a source with a major Western bank, which initially received an invitation to express interest, told Reuters.
According to a second banking source, Essar Oil is expected to issue a request for proposal for the pre-finance loan as early as at the beginning of the second quarter of 2018. The traders that would become creditors would be repaid in gasoline and gasoil.
In August 2017, Rosneft finalized the acquisition of 49.13 percent in Essar Oil, while an investment consortium comprising oil trader Trafigura and UCP acquired another 49.13 percent in the Indian refiner. The closing of the acquisition of Essar Oil was delayed compared to its initial target closing date, the end of 2016, because Indian creditors of Essar Oil delayed their approval of the deal.
Bank loans to Essar Oil are complicated not only by the Russian shareholder of 49 percent of the company. Banks are also wary that Essar Oil relies on significant volumes of crude oil from Iran and Venezuela for its operations. With the U.S. sanctions on Iran still in place, and possibly expanding, and the U.S. considering imposing sanctions on Venezuela’s oil industry, Western banks are not really rushing to lend money to Essar Oil.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews.