Russia barges in on Iran's oil bromance with India

How India is benefiting from cheap oil

Iran has some tough new competition in the race to capitalize on India's booming demand for oil.

State-owned Russian energy giant Rosneft is the lead investor in a $12.9 billion buyout of India's Essar Oil that was announced over the weekend. Russian investment group United Capital Partners (UCP) has also snapped up a stake.

The purchase of the oil refiner gives Russia more muscle in India at a time when its demand for energy is booming.

"Rosneft is entering one of the most promising and fast-growing world markets," CEO Igor Sechin said in a statement.

India is already the world's third-largest oil importer, and its demand will jump by more than 300,000 barrels per day this year, according to the International Energy Agency. That's more than any other nation.

Related: OPEC output hits new record high

It's a trend that has attracted other top crude producers -- especially Iran.

Iran has been upping its oil production since it was freed from sanctions in January. Much of the crude has been sold to India, which maintained close ties with Tehran while the trade restrictions were in place.

India is well positioned as a buyer because many of its refineries were built to process Iranian-grade crude.

Related: India and Iran renew relationship in post-sanctions world

essar oil
Storage tanks at an Essar Oil facility in India.

But Rosneft's purchase of Essar Oil will complicate Iran's play.

Roughly 40% of the crude imported from Iran was refined at Essar Oil's massive refinery in the state of Gujarat.

Now that the refinery is under new ownership, it's likely to be processing more shipments from Russia.

Lalit Kumar Gupta, Essar Oil's chief executive officer, told Bloomberg in August that shipments from Iran would decline if Rosneft bought a stake in the Indian firm.

"When they are on board we will see how much to buy, what to buy," he said.

Now, Iran might need to find new buyers in a global market already saturated with supply.

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