London-listed Essar Energy has signed an exclusivity agreement to buy Royal Dutch Shell's British refinery, Stanlow for $350 million (£219 million). The exclusivity agreement will last till April 1, which gives Essar Energy time till March-end to strike a final agreement — or pay Shell a break fee of $50 million.
Earlier, Shell had set a deadline of February-end to reach a deal. The new agreement would give Shell time to start its standard consultation exercise with employees, before the final signing. As much as $175 million will be payable on completion of the acquisition, with the remainder plus interest a year later, and will be funded from existing cash resources and, potentially, a new debt facility. The acquisition is expected to be completed in the second half of the year, subject to the approval of Essar Energy shareholders.
“Many of the assets being shut down are low [Nelson] complexity, smaller assets. Stanlow has a complexity of around 8.2 and accounts for around 15 per cent of production from the UK, so this asset really does not fit into that [troubled] group,” Mr Prashant Ruia, CEO of the Essar Group, told
He added that the nature of the facilities, including the tankage capacity and distribution pipeline access meant the firm would have the flexibility to bring product from India.
“We wanted to get into the UK market...It would give us the ability to bring in supplies whenever the UK is short.” The firm is not looking at other European assets. “We are very much focused on this new acquisition.”
The Stanlow refinery, on the Manchester Ship Canal in the English county of Cheshire is Britain's second largest refinery, producing around 233,000 barrels a day, with the capacity of around 296,000. It produces around a sixth of Britain's petrol and has around 960 employees.
The purchase price amounts to around $1,182 a barrel, based on a capacity of 296,000 barrels a day, against around $8,140 a barrel for BP's 2007 sale of its Coryton refinery, and the $3,376 a barrel paid by Rosneft for Ruhr Oel. The gross refining margins at the Stanlow refinery are also higher than many in the region “ with gross refining margins in the first half of 2010 amounting to $4.90 a barrel, against the $2.73 benchmark.''
The acquisition will raise Essar Energy's refining capacity by two-thirds. With its distribution pipes and tankage capacity, it could provide a conduit for the company to export product from Vadinar to Europe. The firm plans to raise capacity at its Vadinar refinery to 20 million tonnes a year by mid-2011, and will be capable of producing EU- standard clean petrol and diesel.
It is one of three refineries in Europe that Shell put up for sale in March 2009, as part of a strategy to cut net refining capacity by 15 per cent, in line with other oil majors, which have been selling out of their low-margin European refining processes.
Apart from a brief spell in 2005 to 2008 due to rampant demand in China that caused spare capacity to go to zero levels, refining has always been incredibly low margin business, said Sanford Bernstein oil analyst Oswald Clint.
With all the major integrated firms trying to exit the business, it is a good opportunity to buy assets at very low prices, says Brendan D'Souza, oil analyst at Seymour Pierce.