MUMBAI (Reuters) - Russian oil major Rosneft and partners closed their $12.9 billion purchase of Indian refiner Essar Oil on Monday, giving them a foothold in one of the world’s fastest growing oil users.

Prashant Ruia, Director, Essar Capital speaks during a news conference at the company's headquarters in Mumbai, India August 21, 2017. REUTERS/Danish Siddiqui

The deal is the first foray by Rosneft into Asia’s refining sector and the biggest foreign acquisition ever in India, as well as Russia’s largest outbound one. It also deepens Russian and Indian economic ties that stretch back to the Soviet era.

Kremlin-controlled Rosneft and its partners - global trader Trafigura and Russian fund UCP - purchased a 98.26 percent stake in Essar Oil in a deal announced in October. The rest of Essar will be held by retail investors.

“(Rosneft) has entered the high-potential and fast-growing Asia Pacific market,” Rosneft’s Chief Executive Officer Igor Sechin said in a statement.

The deal will enable Rosneft to improve the efficiency of fuel supplies to other nations in Asia, he added.

India’s oil demand is expected to rise by an average of 5.9 percent a year through 2020, among the fastest in the world, according to a report last month by Goldman Sachs.

To capitalise on that, Rosneft and its partners are acquiring Essar’s oil refinery in Vadinar that can process 400,000 barrels a day of crude. The refinery is in the western Indian state of Gujarat and the deal includes a port, a power plant and 3,500 fuel stations.

OUTLET FOR OIL

Rosneft has previously announced deals to invest in downstream assets in China and Indonesia, but none of these facilities are yet functional.

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“The deal will give the consortium a strategic foothold into Asia and opens hitherto unserved markets. Entry into the Indian refining sector will help Rosneft secure a stable outlet for its oil,” said Tushar Tarun Bansal, director at consultancy Ivy Global Energy.

The Russian major’s stake in Venezuelan upstream assets and oil purchase contracts with state-owned PDVSA will help to improve the economics of the Indian refinery, Rosneft said.

Reuters last year reported that Rosneft planned to supply Venezuelan oil to the Vadinar refinery.

“Rosneft can swap its Venezuelan oil with sources near to India to improve the refinery’s profitability. This also indicates that Rosneft is expanding its global footprint despite U.S. sanctions,” said Bansal, referring to restrictions placed on Rosneft and some other Russian entities following Moscow’s 2014 annexation of Crimea from Ukraine.

Rosneft recently signed a deal to explore and develop five fields in Iraq’s Kurdistan as part of its global expansion, and also wants to open a trading arm in Singapore.

Tony Fountain, the chairman of Essar Oil under its new owners, said the company would increase its number of fuel stations to 6,000. Rosneft also plans to double Vadinar’s refining capacity and build petrochemical facilities.

Trafigura and Rosneft are the latest international companies after Royal Dutch Shell and BP to enter the Indian fuel retailing market.

EASING DEBT PAINS

The deal also reduces some of the strain on Essar Group, which is controlled by the billionaire Ruia brothers. The group, with a presence in oil and gas, steel, ports and power, has been under pressure to reduce its debt.

Essar Capital director Prashant Ruia told a news conference the transaction would cut Essar Group’s debt by about $11 billion. Of that, $6 billion will be transferred to the new entity controlled by Rosneft, while $5 billion will be paid off.

Essar Oil’s new owners will repay $600 million of the debt it is taking on to Indian lenders, and will also settle over 2 billion euros ($2.4 billion) owed to Iran for past oil purchases.

“The deal augurs well for more such cross border transactions where foreign capital can flow into potentially stressed assets of India, which will eventually help the banking sector,” said Pramod Kumar, Managing Director & Co-Head of Banking at Barclays.

Chanda Kochhar, managing director and chief executive of India’s ICICI Bank, said the deal would reduce ICICI Bank’s exposure to the Essar Group by about 50 percent, without elaborating.

($1 = 0.8491 euros)