Essar Oil Ltd, India's second largest private refiner, was set to sign on Tuesday a $1 billion loan deal with China that sources said would be backed by a supply of refined products to PetroChina.

Essar Oil was set to finalize a preliminary agreement with the China Development Bank (CDB) on Tuesday to borrow the amount during Chinese Prime Minister Li Keqiang's visit to Mumbai.

The Indian firm, controlled by billionaire brothers Shashi and Ravi Ruia, has been replacing its rupee debt with lower-cost, overseas loans and has so far refinanced $481 million.

"As part of our initiative to dollarize our debt, we have been in discussion with several international banks, including Chinese banks. CDB is part of that conversation," Essar Oil said on Monday. However, it declined to confirm the deal.

The group hopes to refinance another $1.8 billion within the next three to six months, Essar Oil Chief Executive L. K. Gupta had said on May 10.

The deal could also signal a long-term tie-up on crude supplies, with Essar looking to take ultra-heavy Latin American crude from PetroChina, one of the sources said.

Crude oil producers in Latin America have been scouting for new buyers in Asia as the US shale oil and gas boom has reduced demand for their heavy and ultra heavy crudes.

Essar has purchased Castilla crude from China National United Oil Corp, or Chinaoil, and Ecuador's Napo crude from Petrochina, trade sources said. Essar aims to meet about 30-40 percent of its oil needs from Latin America, Gupta said.

"We have been sourcing a significant portion of our crude from Latin America. PetroChina is a strong player in this region and will thus continue to be an important trade counter party for us," Essar said.

Reuters