Essar Oil’s (UK) acquisition of the Stanlow oil refinery five years back marked the beginning of a transformation that few could have imagined. Not only did Essar, the global behemoth with interest varying from oil to steel, successfully reconfigure the refinery into a single train highly optimised site, which increased the yield of high margin products such as gasoline, Stanlow today caters to around 16% of UK’s road transport fuel demand – producing over three billion litres of petrol, 4.4 billion litres of diesel and two billion litres of jet fuel per year.
Essar Oil (UK) Limited, a subsidiary of Essar Energy Limited, announced its best ever performance for the first nine months of a Financial Year, for the year ending March 31st 2016. Profit after Tax (PAT) was its highest ever at $179 million, against $35.3 million in FY15.
Essar Oil UK also reported its best ever Current Price Hydrocarbon Margin (CP HCM) at $10.1/bbl, a 20% increase to the $8.4/bbl reported in FY15, primarily due to refinery reconfiguration and improved benchmark margins.
Essar has also entered the UK retail market, with its branded service stations opening in Coalville, Leicestershire and Walkden, Manchester. A third site in Middleton, Lancashire was unveiled in January 2016. “Product availability to customers was again 100%. This continued the excellent performance seen across the entire twelve months of FY15 where 100% availability significantly contributed to energy supply security in the North West of the UK,” said an official.
Stanlow again saw the benefits of operating as an optimised single train site, which has increased the yield of high margin products such as gasoline and middle distillates and also reduced production of lower margin products such as fuel oil and naphtha.
A lot of work, said sources, has gone into transforming Stanlow, after it was acquired from the Royal Dutch Shell in July 2011, to what it is today.
The refinery has made substantial performance improvements made under Essar ownership and Essar Energy Ltd’s total investment in EOUK Ltd is a substantial $694 million along with bringing in a highly experienced management team.
Essar, said sources, brought with it the huge experience it has in the sector that provided the much needed boost for Stanlow.
Essar Energy, a world-class, low-cost, integrated energy company, is one of India’s leading private power producers with eight operational power plants in India and one in Canada with a total operating capacity of 6100 mw, that is under various stages of construction. The group has access to coal through two captive mines with reserves of around 72 mmt in Indonesia and around 52 mmt in India.
Essar has an established track record and assets worth $18 billion across the Power and Oil and Gas industries.
Its refining and marketing business in India comprises of Vadinar refinery in Gujarat, which is India’s second largest single location refinery, having a nameplate capacity of 20 million tonnes per annum.
The company has pursued a strategy of margin optimisation with a focus on high margin products, crude diversification, cost saving programmes, de-bottlenecking, shift in yield to better fit UK demand and 100% availability of high quality products to customers.
Essar Oil’s (UK) main asset, the Stanlow oil refinery, has a nameplate capacity of 9 million tonnes per annum. “Stanlow refinery is strategically located in the industrial heartland of north-west England with excellent infrastructure links through port, pipeline and road,” said an official.
“Stanlow is strategically positioned to serve the UK energy corridor and has a structural margin advantage. Its defensive business model means that it is cash generative even under conservative market assumptions. It remains a well-invested business – the ongoing capex program and margin boost opportunities. It has a blue chip client pool and strong UK market share,” said another official.
Essar Oil (UK) has a robust financial forecast for next five years. The working capital financing has been fully committed for the next three to five years. Moreover, it has entered into an inventory monetization facility with J. Aron & Co (a subsidiary of Goldman Sachs International Inc.) for five years with an auto renewal clause and a securitization facility arranged by Lloyds Bank for three years.
There has been a significant improvement at Stanlow following the acquisition. EOUK, an official said, has enhanced its GRM delta over NWE Benchmark by $3/bbl through various initiatives since acquisition thereby taking EOUK margin to $5/bbl more compared to NWE Benchmark. “The last signification configuration change was in September 2014 when the refinery was converted into single Train CD4 Mode. The current year net cash generation is expected to be $243 million.”
Stanlow’s strategic location helps it to serve the UK market like none else. “Its road loading terminal is capable of handling 26.5m litres per day. The Tranmere Terminal includes two Jetties and is capable of handling fully laden ships up to 120kt and partially laden VLCCs up to 170kt. There is a direct connection to UK Oil Pipeline and Manchester Jet Line,” he said.
Our main focus, said an official, is on products with margins that support long term sustainable profits and minimise low value products from bottom of the barrel and gasoline components, which are likely to generate losses. Stanlow has reduced operating costs while the profitable petrochemical linkages remain intact.
ATKearney and HAY Consultancy have been appointed to look at its opex/capex cost and provide potential improvement and saving opportunities. “Based on an internal assessment and inputs from these consultants, Essar Oil (UK) has prepared a roadmap for further annual $100 mn value improvement going forward. Shell Crude supply and Product off-take contract are scheduled to expiry by July 2016 and a proper strategy to ensure continuity of supply agreement with Shell along with enhancement of values over original terms is already identified,” he said.
In Addition to Shell initiatives, the Group has large a opportunity enhancement roadmap under the Project Tiger Cub which will reduce crude cost.
Working capital requirement of Essar Oil (UK) (EOUKL) is mainly driven by the Crude & Product Inventory and Receivables as per below.
EOUKL has financed its Crude & Product Inventory together with Shell receivables by way of Inventory. Stanlow has been designed with multiple layers of redundancy, which enable the site to run safely and with high levels of availability. The redundancy by design addresses the impact of single events, such as loss of Power Supply, loss of Cooling Water, or failure of critical equipment.