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
Barclays has also taken control of inventories of crude oil and
refined products on the site worth $700 million, Essar
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
Analysts and industry executives have said that several more
refineries will need to close in Europe before healthier profit
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
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
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
"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
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