India-focused refiner Essar Energy has signed an agreement to buy Shell's Stanlow refinery and associated marketing businesses in the UK for $1.3 billion, after more than a year of talks for the assets.
Essar Energy entered into an exclusivity agreement with Shell to buy the 270,000 b/d Stanlow refinery in mid-February and had until April 1 to commit to a deal.
Essar said it is paying $350 million the refinery, with the value of crude and products stocks and related marketing assets taking the acquisition price to around $1.3 billion.
"We are very pleased to have agreed this transaction with Shell. Stanlow is a high-quality refinery and is an excellent fit with our strategy," Essar CEO Naresh Nayyar said in a statement.
"We look forward to taking ownership of Stanlow in due course and making operational improvements which will enhance production and better optimize the facility," he said.
Under the agreement, Essar will buy crude and feedstocks for the refinery exclusively from Shell on a spot basis for five years and Essar will supply refined products from Stanlow to Shell for up to 10 years.
The assets include distribution terminal assets and bulk fuels and local marine fuels businesses, but not any Shell-owned retail fuel sites.
The transaction is expected to close during the second half of 2011 subject to Essar Energy shareholder approval, the companies said.
Downstream exposure
Shell first sought buyers for Stanlow in mid-2009 as the global recession shrank demand for fuels and weakened the outlook for global refining margins.
Shell said the sale means it will have cut its global refining exposure by a total of 1.6 million b/d since 2002, bringing it closer its stated goal of reducing its worldwide refining capacity by 15% through a combination of asset sales and closures.
"The decision to sell Stanlow is part of our drive to concentrate our global manufacturing portfolio on larger assets," Shell's downstream director Mark Williams said in a statement.
The company has already sold its 87,000 b/d Gothenburg refinery in Sweden, the 93,000 b/d Heide refinery in Germany and its 17.1% share of the 145,000 b/d Marsden Point refinery in New Zealand.
It has also announced plans to close the 110,000 b/d Harburg refinery in Germany after failing to find a buyer for the plant.
The sale of Stanlow will leave the Anglo-Dutch company with no refining assets at all in the UK, having closed the Shell Haven refinery near London in 1999.
New markets
Essar is targeting 1 million b/d of global oil processing capacity by expanding its Vadinar refinery, buying Stanlow and a possible expansion of its Kenyan plant as it seeks new markets for fuel exports.
With its access to UK distribution pipelines and tank capacity, the Stanlow deal opens the possibility of Essar exporting fuels from its Vadinar refinery on the west coast of India to the UK once the Indian plant is upgraded. The Indian plant's capacity is being raised to 375,000 b/d later this year and to 405,000 b/d by late 2012.
The company has said it sees its fuel exports rising to around 40% of sales in the "medium term," as a wave of planned new capacity by India's public-sector refiners crimp its domestic sales potential.
Last year, Essar's fuel exports comprised around 31% of total sales.
Stanlow is the second-biggest refinery in the UK, accounting for around 15% of UK fuel production, and is the seventh-biggest in Europe.
According to Essar, Stanlow has been running at only about 225,000 b/d, which is 75% of its capacity of 296,000 b/d.
Essar has said it plans to remove processing bottlenecks at the plant to increase crude throughput and may also look at a change in the crude slate to boost profitability.
Essar said that, even before the planned improvements, Stanlow is "more profitable than most," generating earnings before interest, tax, depreciation and amortisation of $63 million in the first half of 2010.
Its gross refining margins are around $2-$3/b higher than the benchmark North West Europe margins, achieving a $4.90/b gross margin during the first half of 2010 compared with the benchmark $2.73/b, Essar said.
