Essar Energy completed the $1.26-billion takeover of Royal Dutch Shell's Stanlow refinery in the UK on Monday, providing the company with its first step into the European market as well as a potential market for product from Vadinar.

“It's a quantum jump in terms of the group's presence in Europe and its refining capacity,” said Mr Naresh Nayyar, Chief Executive Officer. The acquisition raises Essar's capacity to 800,000 barrels a day.

Essar Energy has committed to making operational improvements to the plant, which operates at 75 per cent of total capacity of 2,96,000 barrels a day. Mr Nayyar said the company planned to spend around $100 million a year on HSE (health, safety and environment) and other changes.

The company has already identified some “quick fixes” and other changes needed to improve operational efficiency and is looking at broadening it's range of crude oil that can be produced. “For the site, it's quite a long time since we heard of any investment and growth opportunities. So, from the point of view of employees, it's a positive message,” said site manager Mr Frank Willsdon.

No immediate plans

The company has no immediate plans to increase the work force, though would do so if it was necessary, said Mr Nayyar. “This is very early days.”

Stanlow, covering 1,350 hectares (300 football fields) on the Manchester Ship Canal in Cheshire, is Britain's second-largest refinery, producing around 233,000 barrels a day. It produces around a sixth of Britain's petrol and has around 950 permanent employees (from around 5,000 in the plant's heydays in the 1960s and 1970s) and between 1,000 to 5,000 contractors.

The handover was completed at midnight in London, with the Shell flag being lowered and the Essar one raised on the site. Following a weekend of busy preparations, all Shell signage had been removed and replaced with Essar.

“When our employees come in today, we wanted them to see and feel a different looking site and start to feel part of a new company,” said Mr Willsdon. “We are entering the new world in the right spirit and with some momentum.”

In the past month, the company reached an agreement with worker representatives and unions under which current employees will get a final salary-pension scheme on similar terms to Shell while new employees will be taken on a direct-contribution scheme. Essar Energy signed the deal to buy Royal Dutch Shell's Stanlow refinery in March this year following a protracted sales process. The acquisition does not include Shell's lubricant oil-blending plant or its higher-olefins plant on the site. The company is paying $350 million for the refinery in two equal tranches — the first of which was paid on completion.

It paid an unspecified amount to cover the costs of transferring to Essar Oil, the company said on Monday. The second tranche is due on the first anniversary of that completion.

Essar Energy has also paid Shell $916 million for the refinery's stock of crude oil and refined products at market prices at the time of completion, funded from a $1.5-billion three-year secured revolving-credit facility with Bank of America, BNP Paribas, HSBC, Lloyds TSB, Standard Chartered and West LB. Shell, along with other European oil majors such as BP and Eni, has been reducing its presence in the refinery market where margins are under pressure.

A case apart

Essar Energy maintains that Stanlow is a case apart from low-grade refineries as it has the capacity to produce highly refined products in an increasingly shrinking market. (Stanlow has a complexity of around 8.2.) It hopes to be able to use the heavier, tougher crude oil, along with the sweet light crude oil currently used at the refinery.

“Unlike low-complexity small refineries, we believe Stanlow can sustain even an adverse refinery-cycle scenario,” said Mr Nayyar. He argues that Stanlow will continue to benefit from strong demand as more operators in Europe continue to close refineries or convert them into terminals.

The company also hopes that Stanlow's tankage capacity and distribution-pipeline access mean that it will have the option to bring produce from Vadinar. Essar Energy plans to raise capacity at Vadinar to 405,000 barrels a day from 300,000 barrels a day by September next year.

Vadinar will shortly begin producing Euro-4 and -5 standards product. Export from Vadinar to the UK will depend on “arbitrage and economics” at the time, Mr Nayyar said. By the time of the next monsoon season when demand in India falls, the company could begin sending products to Stanlow should the need arise.

“Our focus is clearly the integration of all three refineries and optimising local operations and generating synergies,” said Mr Nayyar.

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