Shell accelerates sell-off of US Gulf Coast refining assets

June 7, 2021

Royal Dutch Shell PLC has entered agreements to sell its full ownership interest in two US Gulf Coast refineries in line with a series of divestment initiatives by the global operator during the last several years to concentrate its downstream footprint on a smaller number of integrated assets and markets where it can be most competitive.

As part of a May 24 agreement, subsidiary Shell Oil Co. inked a deal to sell the entirety of its 50.005% interest in Shell Deer Park Refining LP to 50-50 joint venture partner Petróleos Mexicanos (Pemex) subsidiary Pemex Transformación Industrial (PTI) Norteamérica SA de CV for $596 million, plus hydrocarbon inventory to be valued at closing with an estimated current value in the range of $250-350 million, Shell and Pemex said.

Shell—which was not seeking to shed its stake in the 340,000-b/d refinery given its integration with subsidiary Shell Chemical LP’s collocated chemical complex at Deer Park—said the proposed divestment follows an unsolicited offer by Pemex to acquire full ownership and operation of the JV. Shell’s decision to sell simply came as an opportunity to further focus its refining footprint while also maintaining integration optionality value through its chemicals and trading activities, the company said.

As part of the transaction—which is scheduled to close during fourth-quarter 2021 pending US regulatory approvals—Shell and Pemex have agreed to maintain integration and close collaboration between the refinery and Shell Chemical’s 100%-owned Deer Park plant to capture synergies and economies of scale for both sites, according to Pemex.

Given Pemex’s nearly 30-year history as a partner in the refinery, as well as its familiarity with the site and plant personnel, transition and handover of operations are expected to proceed safely and smoothly, with all current refinery employees to be offered employment by Pemex, Guy Hackwell, Shell Deer Park’s manager, said in a letter to the local community.

Pemex—which has held 49.995% in Shell Deer Park Refining since 1993—said the move to take full ownership of the refinery comes as part of its new business policy under Mexican President Andrés Manuel López Obrador to advance Mexico’s national oil industry and enable the country to achieve complete energy independence and security (OGJ Online, Feb. 1, 2021; Oct. 19, 2020).

Following startup of its grassroots 340,000-b/d Dos Bocas refinery currently under construction at Paraíso, Tabasco, and completion of ongoing rehabilitation programs at its existing six refineries by yearend 2023, Pemex said addition of the Deer Park refinery to its refining portfolio will enable the operator to supply nearly 1.4 million b/d of gasoline, diesel, jet fuel, and other petroleum products to meet Mexico’s total demand for transportation fuels.

Pemex—which plans to purchase the Deer Park assets, including inventories, via a combination of cash and elimination of Shell’s debt obligation in the JV—said the debt-free acquisition will be fully funded by Mexico’s federal government.

Located about 20 miles east of downtown Houston along the Houston Ship Channel, the Deer Park refinery—which receives more than half its crude feedstock from Mexico—has flexibility to process a mix of heavy and light sour crudes from Canada, the US, Africa, and South America to produce 110,000-b/d of gasoline; 90,000 b/d of diesel; 25,000 b/d of jet fuel, and other products such as petroleum coke, according to Shell and Pemex.

So long, Saraland

Less than 48 hours following announcement of the planned Deer Park sale, Shell confirmed on May 26 a separate deal under which subsidiaries Equilon Enterprises LLC (dba Shell Oil Products US), Shell Oil, and Shell Chemical have agreed to sell 100% of Shell’s interest in the 90,000-b/d Saraland refining and petrochemical site in Mobile, Ala. to Houston-based Vertex Energy Inc., a specialty refiner of alternative feedstocks.

Also scheduled to close during fourth-quarter 2021 pending regulatory approvals, the transaction covers sale of the Mobile refinery and associated, collocated logistics infrastructure, including product racks, an associated dock, and the Blakeley Island Terminal for a consideration of $75 million in cash, plus the value of hydrocarbon inventory, which currently ranges from $65-85 million, Shell said.

The planned divestment comes as another step in the company’s manufacturing strategy to reduce its global footprint to core sites integrated with trading hubs, chemical plants, and marketing businesses as a means of delivering resilient returns and meeting increasingly diverse needs of customers, according to Robin Mooldijk, Shell’s executive vice-president for manufacturing.

As part of the deal, Shell and Vertex said they plan to enter into an initial 5-year crude oil supply agreement under which Shell will obtain all crude feedstock required by the Mobile refinery at a negotiated price to crude oil indices.

Separately, Vertex said it expects to source renewable feedstock through a multiyear agreement with Bunker Holding Group subsidiary Synergy Supply and Trading, as well as potentially from a proposed pretreatment plant Vertex plans to build at its existing Myrtle Grove industrial complex in Belle Chasse, La.

Vertex also confirmed it intends to enter into a multiyear product offtake agreement with Shell, while continuing to supply Bunker Holding’s Bunker One under an existing 10-year agreement. Under those agreements, Shell and Bunker One will purchase 100% of the Mobile refinery’s conventional fuels production, according to Vertex.

Alongside agreements with Shell and Bunker Holding, Vertex also said it will ink a separate long-term agreement with Idemitsu Kosan Co. Ltd.’s California-based subsidiary Idemitsu Apollo Corp., which will purchase 100% of the Mobile refinery’s renewable diesel fuel production at spot market index prices.

Concurrent to announcing its planned purchase of the refinery, Vertex informed investors in a May 27 presentation that, following close of the deal, it plans to immediately begin an $85-million project to convert the site’s existing olefin-feed hydrocracker for production of renewable diesel based on primary feedstocks that could include soybean oil, distiller corn oil, tallow, yellow wax, grease, and used cooking oil.

Scheduled for completion by yearend 2022, the hydrocracker conversion project—which will require about 9 months to complete—will enable the refinery to produce 10,000 b/d of renewable diesel, propane, and naphtha, with production increasing to 14,000 b/d by mid-2023.

Vertex—which will fund the refinery purchase and conversion project using a new $125-million credit facility, potential asset divestitures, and if necessary, issuance of common equity—said the hydrocracker will remain operational during its conversion for 5 of the estimated 9 construction months while engineering and procurement activities are under way.

Upon closing the purchase, Vertex said the Mobile refinery—which currently processes 10-15 light sweet crudes delivered by pipeline and barge—will become its core refining asset, with potential to generate at least $3 billion in annual revenue and $400 million in annual gross profits for full-year 2023 based on current project economics.

Located near the USGC at the north end of Mobile Bay, the Saraland site—which has the optionality to run as a stand-alone refinery to produce base oils or chemicals feedstock—includes about 3.2 million bbl of combined feedstock and product storage, a high-capacity truck rack equipped to accommodate 175 trucks/day, together with deep and shallow-water distribution points capable of supplying waterborne vessels.

Shell reaffirms US presence

Despite announcing liquidation of two of its three current USGC refining assets during the same week, Shell reassured the US will remain a key global manufacturing hub, noting that—in addition to retaining its Deer Park chemical plant—it will continue to operate its integrated refining and chemical sites at Norco and Geismar, La., its Permian basin midstream infrastructure assets, branded retail presence, US Gulf of Mexico offshore deepwater operations, and offices in Houston and New Orleans.

The USGC refinery sell-off follows a series of recent US and global refining divestments and closures by the operator that alongside sale of AS Dansk Shell’s 68,000-b/d Fredericia in Denmark, also includes the recent shuttering of its 239,000-b/d refinery in Convent, St. James Parish, La., as well as the sale of its 149,000-b/d Puget Sound refinery and related logistics assets near Anacortes, Wash., all as part of the company’s broader global program to focus investments on a core set of integrated manufacturing sites more strategically positioned for the transition to a low-carbon future (OGJ Online, May 5, 2021; Feb. 1, 2021; Nov. 10, 2020; Nov. 6, 2020).