Shell is discussing the sale of its three European refineries to Essar, as discussed in a previous post, at $4,000 to $5,000 per barrel of capacity. While valuation will depend on the three refineries’ individual configurations and complexity, the transaction is at a significant discount from the industry’s Golden Age.
The three refineries with more than 500,000 bpd of capacity amount to about 15% of the company’s refining capacity. Essar currently operates a 280,000 bpd refinery in India with plans to expand it to 700,000 bpd in 2011, and half of a 80,000 bpd refinery in Kenya.
Strategically, the Shell refineries will allow Essar to build inroads into the diesel-intensive European market. Such networks will help Essar place diesel volumes out of its expanding Indian refinery, which will likely be oriented to maximize diesel. Of course, short-term results will likely be lackluster but long-term, demand will grow and, in general, refining capacity globally will become constrained.
