Essar Oil confident on refinery growth

MUMBAI (Reuters) - India's Essar Oil Ltd (ESRO.BO) is confident that it will more than quadruple its global refining capacity within the next seven years, despite hitting hurdles in a proposed Iran deal, its top executive said on Wednesday.

Essar Oil, part of the Ruia family-owned Essar Group, whose interests include steel, power, shipping and telecoms, is aiming to have capacity of 1 million barrels per day, with two-thirds of that in India, where it has embarked on the $6 billion expansion of its sole refinery, managing director Naresh Nayyar said.

"The balance, 300,000 bpd, we're looking into different opportunities outside India," Nayyar, who joined the company six weeks ago, said at the Reuters India Investment Summit.

Essar, the second-largest private refiner in India, announced plans last month to expand capacity at its 210,000 bpd refinery in the western state of Gujarat to 680,000 bpd by 2010.

Asian and Middle East nations are building more than a dozen new refineries to feed demand in developed nations, where there has been little capacity expansion in recent years. But many projects have been slowed by surging costs, material shortages and a lack of manpower among the contractors who build the units.

Despite this, and the company's difficulty in completing its first project over about a decade, Nayyar was confident of meeting the mid- or third-quarter 2010 target.

The firm would use Essar Construction's workforce, who had just completed the plant, and expects to place orders for key equipment before the year-end.

Essar Oil shares ended up 0.9 percent up at 300.30 rupees in a Mumbai market .BSESN that closed 1.1 percent higher.

Like rival Reliance Industries Ltd. (RELI.BO), Essar Oil has turned almost entirely to the export market as New Delhi forces the dominant state refiners to sell domestic fuel far below global crude costs, which have trebled in the last four years.

Nayyar said Essar Oil was studying the expansion of its 1,500-strong Indian retail network by another 1,000 stations to build its brand, but only if "market conditions" changed.

"Once this anomaly in the domestic market is corrected then we definitely have plans to sell there, but at this stage it makes more economic sense to export," he said. He declined to comment on when the government might free prices.

IRAN HURDLES

While its domestic growth is on track, Essar Oil has been forced to halt progress on investing in sanctions-hit Iran, following objections by the governor of the U.S. state of Minnesota, where Essar Steel recently bought a steel firm.

Earlier this year it agreed to help build a 300,000 bpd refinery in southern Iran in partnership with the state-run National Iranian Oil Refining and Distribution Company.

"For the time being we are keeping this on hold. If it is permitted within the laws then we have no issue but at the moment the progress is not much," he said.

Under unilateral sanctions, the United States can punish companies that invest over $20 million in OPEC member Iran's energy sector, although it has rarely used this option.

Essar Oil is aiming to produce 250,000 bpd of equity crude by around 2015, but is targeting exploration opportunities rather than asset purchases to reach that goal.

"Acquisition of proven reserves or production facilities is too expensive," Nayyar said.

The company owns oil and gas blocks in India, Myanmar, Nigeria and Madagascar, and Nayyar said it was keen to acquire more assets in West Africa and the Caspian region.

Nayyar, an oil industry veteran who rose through the ranks of top state refiner Indian Oil Corp (IOC.BO), was till recently the chief executive of ONGC Mittal Energy Ltd, a joint venture between steel tycoon L.N. Mittal and India's ONGC (ONGC.BO).

Including Essar's latest plan, India's refining capacity will nearly double to 5.8 million bpd by 2012, topping that of the world's number-three oil consumer Japan and racing far ahead of domestic demand, which is now just 2.8 million bpd.

Oil majors have been cautious to invest in the refining sector for fear of another cyclical downturn, but Nayyar said the "golden era" of the sector was far from over.

"This run is going to last much longer than what is normally believed. If you're able to commission the project by 2010, the first three-four years of good crack margins are sufficient to build your economics," he said.

"But in the end we must remember it is a cycle."

(Editing by John Mair)