Shell Seeks $2 Billion from Aramco in Motiva JV Breakup
Royal Dutch Shell has asked Saudi Aramco for up to $2 billion as part of the breakup of their giant Motiva Enterprises refining joint venture in the United States, the latest stumbling point in a partnership fraught with tension.
The payment would be compensation for the Saudi company retaining a larger share of the nearly two decade-old JV. Its split was announced in March and is expected to be completed in October but disagreements over the payment could postpone the final date, sources close to the talks told Reuters.
Under the agreement announced in March, Aramco will take control of Motiva’s largest U.S. refinery in Port Arthur, Texas, and retain 26 distribution terminals.
That underscored Aramco’s strategy to expand its global refining footprint in order to secure markets for its crude oil and could also be part of its ambitious public offering plan.
Shell will become the sole owner of Motiva’s Louisiana refineries in Convent and Norco, where it also operates a chemicals plant, as well as Shell-branded gasoline stations in Florida, Louisiana and the northeastern United States.
Shell is focusing on developing its global chemicals business but also plans to sell $30 billion of its assets by 2018 to finance its $54 billion acquisition of BG Group in February, which will include several refining assets.
The Anglo-Dutch company is seeking 1 billion to 2 billion dollars from Aramco to compensate for the Saudi company keeping a bigger stake in the JV, two sources close to the talks said. Aramco nevertheless believes the fee should be significantly lower, they added.
A Shell spokesman declined to comment. An Aramco spokesperson said the company does not comment on speculation.
Shell has indicated in the past it will receive a cash payment from Aramco as part of the deal, but the size of the cash consideration has not been disclosed before.
ACRIMONY
The payment is primarily due to Aramco retaining a larger refining capacity than Shell — the Port Arthur plant can process 603,000 barrels per day (bpd) while the two Louisiana plants jointly have a combined 473,000 bpd capacity.
The Texas refinery is also considered more advanced after extensive upgrading in recent years.
Additional infrastructure such as storage tanks and pipelines will also be included in the payment.
Refineries are generally valued according to the quality of the units as well as the outlook for its profit margins.
“It is a little bit of an awkward time for Shell to be holding out their hand for a lot of money because refining margins have come off recently,” said Neil Earnest, President of Dallas-based consultancy Muse Stancil.
“The margin climate has shifted away from Shell towards Aramco in terms of any cash consideration that needs to be exchanged. Aramco will be saying that the cash consideration today should be lower because the short and medium term outlook for U.S. refining margins is not as robust as it was.”
Aramco has rapidly expanded its corporate headquarters in Houston and has hired several new traders in recent months, according to several sources. Motiva’s refined product trading business was separated from Shell’s trading business in Houston in June 2015 after disagreements between the sides, and it has hired several new traders in recent months, trading sources said.
The Motiva JV was set up in 1998. Relations between the partners started to sour during a huge upgrade of the Shell-operated Port Arthur refinery, which suffered several setbacks and cost overruns which doubled the initial plan of $5 billion.
In 2012, the main refining unit at the heart of the expansion was damaged by a release of caustic chemicals, keeping the unit out of production for eight months and leading to acrimony between the partners as costs ballooned.
“The Motiva Port Arthur upgrade cost overruns were received very badly by Saudi Aramco and put the relation under a lot of stress,” said Earnest.
Shell and Aramco continue to cooperate in two major joint ventures: the 50:50 Saudi Aramco Shell Refinery Co (SASREF) in Jubail, Saudi Arabia, and the Showa refining venture in Japan.