Within a span of five-years after acquiring the strategic Stanlow refinery from Shell, Essar Oil UK has turned around the loss making unit with a record net profit of $187 million in 2015-16 as it optimised processes, diversified crude basket and invested in margin improvement programs.
When Essar bought the unit from Shell in July 2011, the refinery was operating at a third of its capacity of 210,000 barrels per day. Today, a major part of the transformation is complete with the refinery clocking nearly 200,000 bpd crude run in FY16.
Essar Oil UK also reported its highest ever EBITDA of $340 million in the financial year ended March 31, 2016 as compared to an EBITDA of $177 million in the previous fiscal.
"EBITDA was negative $17 million in FY12 ," said Naresh Nayyar, Executive Chairman, Essar Oil UK. "Net profit in FY16 is about $187 million as compared to $70 million in the previous fiscal."
Tackling the Turn-around
Essar came in with a typical Indian entrepreneurial approach — cutting red tape, conducting experiments and taking hard decisions, such as closing down redundant or loss-making units. Simultaneously, some financial re-engineering was undertaken to de-risk operations, including inventory management.
"We have optimized crude sourcing and refinery configuration to deliver better yields. Production of petrol and diesel, which fetch higher returns, has been increased. Margin has improved by $3 per barrel since acquisition," Nayyar said.
The refinery’s crude basket was expanded with 25 types of oils, including African grades. This was in contrast to Shell's policy of relying only on North Sea grades that did not offer better economics all the time. These measures alone added $1.4 barrel to margins.
Simultaneously, low-margin lubes unit and smaller distillers were shut down so as to turn the refinery into a single-train unit for more operational flexibility. Natural gas was also introduced as fuel — something Shell has been considering for years. This helped cut fuel costs as well as meet the refinery meet emission norms while ramping up production.
Foray into fuel retail
The Stanlow refinery today produces over 16% of UKs transport fuels, serving north-west part of UK. Being the only Indian firm to own and operate a refinery in Europe, Essar has also entered into auto fuel retailing in UK, opening seven petrol stations with plans to raise the number to 400 in three years.
The company has set a target of 400 outlets in three years. The idea is to carve out 10% of the UK market by playing on the "Made in UK" platform and promising simpler contracts and improved financial and supply terms to dealers. The new approach has seen fuel prices go down by a few pence for consumers and sales rise for dealers in Essar's newly-opened outlets. The retail foray is part of the company's overall plan to ensure a $100-million cash cushion for its refinery operations. The successful turnaround of the refinery gives the company a vantage position since most players source products from plants run by others or import.
The company plans to invest about $137 million in project "Tiger Cub" which will see major improvements to key units at Stanlow to deliver further reduction in crude costs and improved yields across the product slate.
According to Nayyar, "Project Tiger Cub, and the additional works undertaken during the major block turnaround in 2018 will drive a further $2 per barrel in margin improvements."