January 27, 2012:

Stanlow refinery increases capacity for better margins

At a time when refineries across Europe and the UK are shutting down or reducing their capacities, Essar Energy-owned Stanlow refinery in the UK is enhancing its efficiency to improve gross refining margins (GRM). This exercise is a part of its strategy to achieve a premium of $3 per barrel to the northwest European (NWE) margin by March 2014. Instead of reducing capacity, since it produces more of jet fuel and high-speed diesel that is in demand, the company has undertaken efficiency enhancement measures like use of natural gas instead of fuel oil to run boilers and is planning to stop the production of lubricants to increase cheaper crude mix. Northwest European margin is the benchmark similar to the Singapore refining margins that Reliance Industries (RIL) and Essar Oil use in India to declare their GRMs. At the time of acquisition, Stanlow was already getting a premium of $2 per barrel to NWE margins, and within 100 days of the takeover, Essar managed to add $1 in premium. The company hopes to add another $1 by March-end and another $1 by 2014. It will all add up to a total premium of $5 per barrel to its NWE margins. Stanlow refinery averaged a GRM of $8.03 per barrel in the September quarter compared with $3 per barrel when Essar Energy bought the refinery in 2011. In September 2012, the GRM was around $10 per barrel.

The refinery has a total capacity of around 296,000 barrels per day. However, since the overall demand in Europe has slowed down, it is operating at 75 per cent capacity or refining 220,000 barrel per day. The company expects full-year contribution from Stanlow at $10 billion compared with Essar Energy’s $27 billion last financial year. Stanlow has undertaken efficiency-building measures that would add 160 cents per barrel by 2014. The refinery is incorporating changes such as converting six fuel oil-run boilers to run on natural gas. It also plans to stop the production of lubricants from the refinery soon. The company has already passed on crude inventories of around 6.5 million tonnes, out of 7.5 million tonnes, to Barclays Bank for a marginal fee and is saving around 20-25 cents per barrel through this measure. Now, Barclays maintains the inventory for Stanlow and helps Essar save on physically maintaining it. The inventories are now on the books of Barclays. A senior Essar Energy official told Financial Chronicle that the Stanlow refinery has undertaken steps like shifting to natural gas from fuel oil for its six boilers, and is in talks with customers to stop the production of lubricants that constitutes around 2 per cent of the total refinery output, but limits around a quarter of the crude mix. Both these measures would help them to achieve their target and focus on production of jet fuel and high-speed diesel, in which the UK is facing shortage.

“Shifting to natural gas and stopping of lubricant production would add around $1 or 160 cents per barrel to our refining margins. The company is working on some other projects later during this year that would add another dollar to the GRM,” said the official, declining to give further inputs on the new projects. Stanlow refinery has built a 3 km pipeline to get natural gas for the refinery from the nearest gas fields, while the production of lubricants can stop only if customers, who are buying, agree to its closure. “We are in talks with these customers and hope to work out an early resolution soon,” added the official. Stanlow has also increased its basket of crude mix for the refinery to make it cheaper and help increase margins. “We are now sourcing crude from places, such as Canada and Africa, where prices are low. However, the refinery complexity is not as high as our Vadinar facility to source sour-grade Latin American crude at present,” said the official.

According to experts another one million barrel per day capacity can go off-stream in the European market due to excess supply and lower demand. A K Prabhakar, head of retail research at Anand Rathi, said that all the initiatives were good, but the group would have to be consistent in its performance before the stocks were re-rated. Besides RIL, Essar is the only company that can boast of world-class refineries. However, they have never been investor-friendly in the past.

By Financial Chronicle