ESSAR OIL: Big profits may still be elusive

AFTER A long phase of investment, India’s second-largest private refiner Essar Oil is slowly seeing some light at the end of tunnel. The company had invested over Rs 6,100 crore in its business between FY06 and FY09, without a single year of profits. However, with its Raniganj coal-bed-methane (CBM) block in West Bengal set to commence operations, the company could see a steady and growing line of profits.

The company has already drilled 15 wells and is laying the infrastructure. It is targeting test production by the end of March 2010 and commercial production is scheduled to begin by December 2010. As more wells are drilled, the peak output could touch 3.5 million cubic meters a day (mmscmd) in FY13 — equivalent to around Rs 800 crore in annual revenues at current prices.
The company, which is currently expanding its 14-million tonne (MT) refinery at Vadinar to 18 MT by March 2011, hopes to make it more efficient in the process. This expansion will enable it not only to process higher proportion of heavy and tough crude, but also improve the production of light and middle distillates to 79% from current 73%. Increasing availability of Cairn’s crude oil, which comes at 10-15% discount to the benchmark Brent, could also prove a booster.
Essar Oil has also been investing heavily in petroleum exploration (E&P) business and today claims to own petroleum reserves equivalent to nearly a billion barrel of oil. The portion of recoverable reserves could, however, be substantially lower. However, the hurdles for the Ratna and R-series blocks in the western offshore are not over, which the company had won in 1996 but has not been able to get regulatory approvals. It expects to sign a production sharing contract with the government by June 2010 and is estimated to commence production by December 2011.
With the refining margins weakening globally, the company reported a net loss for the December 2009 quarter, which was higher than the preceding September 2009 quarter. Although the company is operating its refinery over and above its rated production capacity, its limited ability to process cheaper crude and produce higher quality products hampered its margins.
Essar Oil has moved ahead with amalgamation of its subsidiary Vadinar Oil and plans to raise funds for its capex programme. The company recently reported that its promoters are conducting a strategic review and may raise capital to fund Essar Oil, in addition to the $2-billion limit that the company is authorised to raise through preferential allotment.
The much-needed steady and assured cashflow that the commercial production from CBM block represents is a key milestone for the company, which carried a debt-equity ratio of around 2.8 for the year ended March 2009. While bad times may be over for the refining industry, Essar’s refinery is not expected to start earning serious profits before the upgradation is completed.