Retail push to aid Essar Oil’s long-term plans

Things seem to be falling in place for Essar Oil with its long delayed refinery going on stream. The company has started trial production at its 10.5-million tonne refinery at Gujarat.

The timing coincides with the global shortage in capacity, and refining margins are strong even if they have come off from their highs. The industry scenario is bright, which is a small solace for shareholders who have had an inordinately long wait for the project to take off.

The company will not start making money immediately, as it will take a few months for the refinery to stabilise. The near-term outlook is strong for refining. For instance, Reliance is building a new refinery, which will be completed by December ’08, on the expectation that the margins are going to be lucrative.

Even though Essar’s refinery has a capacity of 10.5 million tonnes, it should be able to make significant additions (up to 16 mmt) with small investments. Other refiners such as Reliance, MRPL and Chennai Petroleum have done low-cost capacity additions in the past few years.

Essar has already set up a network of 900 petrol pumps, which will be scaled up to 1,500 by the end of this fiscal. The company is going slow on retail sales as margins are negative due to rise in petroleum prices and a price freeze on these products in India. However, in the longer term, having its own retail network will allow the company to capture more value.