(Adds details and background)
By Luke Pachymuthu and Nidhi Verma
SINGAPORE/NEW DELHI Oct 24 Iran's state oil
refining firm and India's Essar Group are expected to start
building a 300,000 barrels per day (bpd) refinery in southern
Iran early next year, sources close to the deal said.
The facility, estimated to cost $8-$10 billion and which
would be the first foreign-invested downstream project in
sanctions-hit Iran, will boost the OPEC member's stagnant
refining sector that is struggling with petrol shortages.
Once finalised, it will be Essar's first overseas refinery
development and will provide a foothold to the family-owned
Indian business house in Tehran, where it is also trying to
build a steel plant and acquire exploration assets.
The proposed plant at the southern port town of Bandar
Abbas, will process heavy crude such as Soroush and Iran Heavy
to be allocated by the Iranian authorities.
"We have completed the feasibility study and now, we are
working on the project financing, and we have targeted starting
on the construction phase next year," a Tehran-based source
from the National Iranian Oil Refining and Distribution Company
The refinery could take three to four years to build, the
Essar, owned by the Mumbai-based Ruias family, will take a
60 percent equity stake in the project with Iran taking the
rest, said the Tehran-based and India-based sources.
"The priority of the new refinery will be to meet domestic
gasoline and diesel requirements, and we will export the
surplus products," said an India-based source familiar with the
Ravi Ruia, Essar Group's vice-president responsible for the
firm's overseas venture and his officials are now in Iran to
take the issue forward.
"If discussions are finalised, then work can begin early
next year," the Indian source said.
An Essar spokesman declined to comment on Ruia's visit and
the company's interest in Iran.
Iran, the world's fourth-biggest oil exporter, last year
launched a multi-billion dollar, five-year plan to expand and
upgrade its refineries to 3.0 million bpd, from 1.6 million
But energy consultancy Wood Mackenzie estimated that Iran's
actual refinery capacity additions would more likely come to
700,000-800,000 bpd by 2014 and cost at least $10 billion.
The country lacks refining capacity and imports massive
volumes of costly motor fuel to meet domestic demand. This has
become a sensitive issue, as the West considers tougher
sanctions against Tehran's nuclear work.
Last week, Iranian officials were reported to have told
local media the country was expected to import $4 billion worth
of gasoline during the Iranian year ending in March 2008,
suggesting a 20 percent drop from the previous year. Officials
have said Iran spent $5 billion or more on imports last year.
Iran's access to financing of mega-projects have been
hindered by tighter credit from European banks and Western
energy firms' reluctance to do business with the Islamic
Republic, depriving it of the expertise and technology needed
for upstream projects.
But Iran has found support from companies in energy-hungry
Asia, eager to participate in its refinery and energy
infrastructure expansion plans in exchange for equity.
"As a heavy oil refinery, it is going to require a
significant amount of conversion facilities to crack deeper
into the barrel and treating units to deal with the high metals
content of the crudes it will be processing," said Vijay
Mukherji, a senior consultant at FACTS Global Energy.
Mukherji said Chinese and Indian firms such as Petrochina
(0857.HK), Sinopec Corp (0386.HK), Reliance RLEN.BO and Essar
are capable of working on downstream projects. "However on the
upstream side, we believe Western technology and expertise is
still required," he said.
Essar, a diversified, family-owned holdings company with
interests from telecoms to construction, also plans to set up
three steel plants in the Middle East, including a joint
venture to build a 1.5 million tonnes a year steel plant in
In January, an Essar official told Reuters the company
wanted to strengthen its relations with Iran and was looking to
buy into Iranian exploration and production blocks to help meet
electricity needs for its planned steel plant.
India's oil minister Murli Deora said in March that Essar
Group is in talks to buy liquefied natural gas from Iran.
Essar is also discussing with Iran to jointly develop the
giant Azadegan field, the Middle East country's biggest
oilfield with in-place reserves of 26 billion barrels.
Japan's INPEX Holdings Inc (1605.T), which holds a 10
percent stake in Azadegan, was slated to develop the field but
the deal fell through last year.
Essar has also submitted a bid for three exploration blocks
in Iran in the most recent auction round.
Its oil refining arm Essar Oil Ltd ESRO.BO launched
India's second private-sector refinery late last year and the
group plans to raise its total refining capacity to 680,000 bpd