Essar, Shell to sign Stanlow deal today

Even as talks with unions at Shell’s Stanlow refinery progress, Essar Energy and Royal Dutch Shell are planning to sign an agreement that would see the Indian group take control of the refinery near Ellesmere Port, Cheshire, UK.

A source close to the development today confirmed Essar Eenrgy and Shell would sign the final agreement at Stanlow tomorrow, two days ahead of the deadline. Though the $350-million deal was undergoing an employees consultation process, it may be signed since the union’s approval is not mandatory for the deal to stand the test of law.

Since early March, Essar and Shell were engaged in a dialogue with the unions to iron out differences that included pension and other issues relating to pay scales for new recruits at the plant. The plant currently employs 960 people, and Essar plans to retain them after taking over the plant.

After the second round of consultation with the union was completed in the second week of March, Essar Energy and the workers had sorted out the difference on the pension plans applicable to the workers in the plant. However last Thursday, one of the union members who is involved in the consultation process said the pay scale for new recruits is still one of the major outstanding issues.

An Essar Energy spokesperson refused to confirm or deny plans for signing the final deal tomorrow at Stanlow. He, however, said the deal would be signed within the next three days.

According to the exclusivity agreement signed by Essar Energy and Shell, the deal has to be signed in the next three days. If Essar Energy decides not to proceed with the acquisition by 31 March, 2011, it would have to pay Shell a break fee of $50 million. Similarly, Shell had agreed to pay Essar Energy a break fee of $10 million if it chooses not to go ahead with the sale.

Under the terms of the agreement, payment for the Stanlow Refinery will be made in two stages, with $175 million payable on completion of the acquisition and a deferred payment of $175 million along with interest payable on the date of the first anniversary of the completion of the acquisition. Payments from Essar Energy to Shell for the acquisition will be funded from existing cash resources and possibly also from a new debt facility.

The Stanlow Refinery currently accounts for around 15 per cent of production from UK refineries. It produces approximately 3.5 billion litres of petrol a year, which is one sixth of UK’s total petrol, along with around 1.5 billion litres of kerosene a year, used for aircraft fuel.

In the first six months of 2010 the Stanlow Refinery reported earnings before interest, tax, depreciation and goodwill amortisation (EBITDA) of $62.7 million and a gross refining margin of $4.90 a barrel. Average industry benchmark gross refining margins were $2.73 per barrel in the first half of 2010.