``The downgrading is on account of escalation in project cost caused by delay in commissioning the project, increasing proportion of debt in the overall funding and significant portion of funding remains to be untied,'' Crisil said.

Moreover, due to depressed oil prices, the company's refinery margins are expected to come down. Essar Shipping (ESL), a group company, is implementing the storage terminal for the refinery project. ESL is also yet to tie up the financing for the terminal project, which will add to the uncertainties in implementation of the refinery project.

These factors are partly offset by the favourable demandsupply gap for petroleum products in the country in the medium term.

Essar Oil is implementing a project for setting up a refinery with a capacity to process 10.5 million metric tonnes per annum of crude at Vadinar in Gujarat, the Crisil release said. The company had earlier considered the usage of 70:30 mixture by weight of light and heavy Arab crudes but now plans to use sweet murban crude as the installation of the Coker unit has been deferred.

The refinery was scheduled to go on stream in April 1999, but having been battered by the cyclone in June the delay in commissioning is expected to be 12 months, it added.

The rating for the NCD issue of Essar Shipping Ltd has been downgraded from `AA-' to `BBB+' and removed from rating watch. The revision in the rating is based on the increase in risk profile of the company due to the transfer of the predominantly debt funded terminal project from Essar Oil and the expected impact of this on the financial profile of the shipping company, Crisil said in arelease.

The rating also factors dependence of Essar Shipping's cash flows on the refinery project being implemented by Essar Oil and the decline in shipping charter rates in the backdrop of the expiry of a bulk of the company's old charters. These factors are partially offset by the strengths of the shipping business reflected in the relatively large, diversified and young fleet and the liquid nature of shipping assets.

ESL operates ships on time and voyage charters in both bulk carrier and tanker segments. Currently the company has a total 14,02,102 dead weight tonnage (DWT), a majority of which is in tanker segment. The company is also implementing a port-cum-terminal project at Vadinar in Gujarat, to handle the crude and product movement requirements of EOL's refinery project being implemented at an adjacent location.