Essar Energy cuts Stanlow refinery capacity in UK, cites low margins

Essar Energy's Stanlow refinery had a negative gross refining margin (GRM) of $2.61/bbl in the third quarter of 2013-14 fiscal. It is a reversal as compared to earning $7.22/bbl in the same period a year ago. In response to the poor performance, Essar Energy plc announced plans to invest $ 100 million to improve the reliability and efficiency at this refinery.

The negative margins are partly "due to major turnaround during the quarter, lower benchmark margins and increased production of lower value intermediary products post the furnace incident," according to a company statement.

In January 2013, Essar's Stanlow Refinery in Ellesmere Port reported a furnace fire.

"At the Stanlow refinery, throughput during the third quarter fell to 5.8 million bbl (MMbbl) compared to 18 MMbbl during Q3 FY2013. This was mainly due to a planned major maintenance shutdown in the quarter and a subsequent furnace incident," the statement said.

As a consequence of the turnaround, furnace incident and negative GRM, Stanlow has had negative cash flow of $287 million in the fiscal year including capital expenditures of $170 million.

"This shortfall has been met by a combination of operating cash flow, extended working capital facilities and equity," according to a company statement.

In combination of poor financial performance and the weak European refining industry environment, "Stanlow is embarking on an estimated $100 million cost-improvement program to ensure that the business is able to weather this period of exceptionally poor refining margins. It will focus on all aspects of operating, capital and financial costs without compromising safety or reliability."

The refinery will be mothballing its smaller crude unit by October this year. According to Essar Energy, the reduced crude operation will lower fuel oil and naphtha production and thus improve absolute margins while delivering cost efficiencies. The Stanlow refinery’s annual crude throughput is expected to decline to 71 MMbbl with the planned changes.