By KONSTANTIN ROZHNOV
LONDON -- India-focused oil company Essar Energy said Wednesday its UK subsidiary has made a new agreement that will see the bank Barclays supply its Stanlow refinery with oil, a move that will make the bank a significant new player in physical oil markets.
Under the three-year deal announced Wednesday, Barclays has already started buying crude for the Stanlow refinery, the UK's second largest.
Barclays has also taken control of inventories of crude oil and refined products on the site worth $700 million, Essar said.
The arrangement will allow Essar's UK unit to repay a revolving credit facility provided by 13 banks, amid challenging operating conditions in the European refining sector.
Around 10 refineries have closed or sharply cut output in Europe since the start of the 2008 economic crisis, as profit margins have plummeted due to lower demand for fuel, soaring crude prices and the high cost of credit to finance day-to-day operations.
Analysts and industry executives have said that several more refineries will need to close in Europe before healthier profit margins return.
Swiss-based Petroplus, once Europe's largest independent refiner, filed for insolvency earlier this year after its lenders suspended access to all credit lines.
Essar Energy's Indian unit, Essar Oil, has also recently been struck by financial headwinds after the Supreme Court of India in January ruled the refiner would no longer be eligible for a program that had allowed it to defer paying sales tax from its Vadinar plant to the government of Gujarat state until 2021.
The Supreme Court has ordered Essar to pay 10 billion rupees ($181 million) in sales taxes to the state government of Gujarat by July 30.
Essar has not made the deal with Barclays because its creditors have any concerns about the company's financial situation, said Andrew Turpin, head of media relations at Essar Energy.
The deal with Barclays benefits Essar operationally by giving it, "lower costs, reduced risk and lower capital deployment," he said.
Essar bought the 296,000 bpd Stanlow refinery from Royal Dutch Shell a year ago for $350 million. On top of that, more than $800 million in capital was needed to cover the cost of crude and refined products stored at the plant, said Mr Turpin.
"The refinery has been capital intensive," he said.
The new deal will allow Essar to have Stanlow supplied with crude on a daily basis, according to its needs.
"Refineries need capital to preserve their business... [and] this structure is more efficient," said John Eleoterio, global head of commodities structured origination at Barclays.
European crude traders said the deal will make Barclays a significant new player in the European physical market for crude and refined oil.
"Wall Street banks [have] been doing it for many years in the US," said a European oil trader who did not wish to be named. "Goldman Sachs, Morgan Stanley and J.P. Morgan Chase pioneered it."
But other banks may not follow the example of striking deals with refiners. It is not quite clear where risks lie and the tough, often unpredictable refining environment in Europe could make the banks vulnerable if profit margins weaken, said Roy Jordan, downstream consultant at Facts Global Energy.
Barclays is currently looking at a number of opportunities in this market, in particular in the US and Europe, said Mr. Eleoterio.
Under the agreement with Essar, Barclays will be getting a fee for supplying Stanlow with crude and another fee for paying Essar immediately for the fuel sold to customers, Mr. Turpin said.
"These fees will be a lot lower than interest paid to banks," through the revolving credit facility, he said.
The Stanlow refinery will continue to supply Shell with oil products as agreed during the sale of the facility last year, Mr. Turpin said. Shell declined to comment.
Dow Jones Newswires