Trafigura’s investment of up to $130M into India’s Nagarjuna Oil Corporation's (NOC) refinery and storage facility has established a new way of working for independent oil refiners and commodity traders.
The Dutch commodities trader’s purchase last month of a 24% stake in the refinery, currently under construction in India’s Tamil Nadu state, set a precedent as the first tie-up of commercial trader and refinery outside of an integrated oil major. It is also Trafigura’s first foray into the oil refinery and storage business in India.
The transaction will also see Trafigura invest $120 million in storage tanks and infrastructure adjacent to NOC's refinery.
Clifford Chance’s partner Merrick White, who led the Singapore team representing NOC, said the transaction could prompt more tie-ups between independent refineries and traders.
“The involvement of major oil companies in the refining market is changing as the integrated oil companies, such as Shell or ConocoPhillips, sell off or de-merge parts of their refining businesses,” he said. “But this deal establishes a new way of working, by creating a mutually-beneficial operational precedent for refinery owners and crude oil traders operating outside of an integrated business.”
The transaction focused for the first time not only on the development of a refinery but also its commercial optimisation, with Trafigura responsible for providing the crude oil feedstock and offtaking some of the refinery products. This is a relatively new concept in the market outside of this integrated oil majors and NOC are pleased to be able to draw upon the expertise of a major oil trader in that respect, White said.
But aligning the vision and interests of both parties to achieve a commercially optimized refinery proved challenging, he said.
It required legal innovation to establish new agreements that provide for a joint refinery and trading team that maximises the commercial performance of the refinery by securing the optimum crude oil feedstocks that will give the highest refinery margin for the refinery's potential refined product range. And this needs to be achieved while managing the commercial conflicts inherent in the crude oil buyer-seller relationship.
“As far as we are aware this is a new form of business cooperation between a refinery and a crude oil trader” he said. “This type of arrangement was previously only seen within the integrated oil companies. It is normally something refinery companies will establish internally, not in conjunction with their crude oil supplier.” But as refineries are increasingly operated by companies outside of the integrated oil majors this may be the first of many similar transactions.
“It was a unique but very interesting situation,” he said. “Establishing terms which would benefit all parties, and ensure they were aligned to achieve the objective of maximized refinery margins was a challenge.”
Due to start up in the first half of 2013, the refinery will have the infrastructure to receive and handle Very Large Crude Carriers through a single point mooring.
In a statement, NOC chairman K.S. Raju said it was a significant milestone for the group. He added NOC planned to raise the refinery’s capacity to 15-million-tonnes/year by 2015.
Trafigura’s APAC oil director Jonathan Pegler said it was an important, long-term venture for Trafigura and an exciting project for all concerned.
“It plays directly to the strengths of NOC as a leading process operator and to Trafigura as a company committed to balancing international supply and demand for oil products,” he said. “India is fast emerging as a leading hub for oil refining, with domestic demand rising and an increasing trend towards cleaner refined products. In this context, the NOC Refinery agreement represents a significant development for us.”