Essar Energy plc (LSE:ESSR), the India-focused integrated energy company, yesterday released its Interim Management Statement (IMS) for period ended 30 June 2012. Highlights Solid operating performance - High power plant availability - Vadinar refinery throughput increased by 24% to 4.48 MMT primarily due to completion of expansion project on 29 March 2012 - 12% increase in Vadinar refinery current price GRM to US$4.69/bbl - Full impact of complexity upgrade from H2 FY2013
- Stanlow refinery current price GRM of US$7.53/bbl
Vadinar refinery optimisation project completed 4 months ahead of schedule
1,200 MW Salaya I coal fired power project commissioned
Unit 1 (255 MW) of Vadinar P2 coal fired project commissioned
Final approval for Aries coal block (Indonesia) and provisional approval for Mahan Coal block (India)
US$450 million bridge loan refinanced and Stanlow inventory monetised
Rs.50 billion (c.US$900 million) loan facility secured to meet deferred sales tax liability
Essar Oil CDR exit and replacement Rs.94 billion (c.US$1.7 billion) facility agreed
Production and Operating Commentary
Power
Production and availability from the Company’s main operating power plants compared to the prior corresponding three month period was as follows: Asset Generation (MU) Availability % Plant Load Factor % 3 months ended 3 months ended 3 months ended June 2012 June 2011 June 2012 June 2011 June2012 June 2011
Hazira I (515 MW)
1 Vadinar and Vadinar P1 results include steam supply converted into equivalent units of power generation
2 PLF revised based on total generation capacity including steam generation
3 Salaya 1 (1,200 MW) was commissioned in 2012, hence nil generation, availability or plant load factor in 2011
2 During the quarter ending 30 June 2012, all plants performed well with total generation of 1,945MWh (2011: 1,502MWh). Generation was higher in the June 2012 quarter by 29% over the corresponding quarter last year, mainly due to commissioning of Salaya in current quarter.
With higher gas prices resulting in a higher generation cost, there has been an impact on demand at our gas based plants in recent months. The June 2012 quarter saw plant load factors reduced by 22% at Hazira due to lower demand from GUVNL, the Gujarat State utility.
With the ramp up of the newly expanded Vadinar refinery resulting in an higher demand for power and steam, generation at the Vadinar and Vadinar P1 power stations has increased considerably compared with the corresponding period in the previous year.
The recently commissioned Salaya I coal fired power plant had good availability of 69% during the period as it continued to ramp up to full capacity. Plant load factors were lower than anticipated at 22% due to restricted water availability ahead of the monsoon season. A full year target of 65% plant load factor remains in place, although this may be challenging depending on water availability.
Refining and Marketing
Throughput and production from the Company’s refineries compared to the prior corresponding three month period was as follows: Asset Throughput (mmt) Production (mmt) CP GRM (US$/bbl)* 3 months ended 3 months ended 3 months ended June 2012 June 2011 June 2012 June 2011 June 2012 June 2011
Vadinar
* Current Price GRM – for a definition see Essar Energy’s full year results dated 25 June 2012
For Vadinar, excludes sales tax incentive of US$3.76/bbl in the three months ended June 2011.
** Stanlow refinery data from 1 August 2011
During the June 2012 quarter, the Vadinar refinery achieved a throughput of 4.48 million metric tonnes (mmt) compared with 3.62 mmt in the same period last year, a 24% increase. The increase in throughput was primarily due to the completion of the refinery expansion project at the end of the quarter ending March 2012. The operation of all the expansion units were stabilised during the quarter and by the end of the period the refinery achieved the full design capacity of 20 mmtpa.
The Vadinar refinery has achieved a CP GRM of US$4.69/bbl for the quarter ended June 2012 compared with the IEA Singapore benchmark margin of US$(0.43)/bbl in the same period, a premium of US$5.12/bbl. The full effect of the complexity upgrade at Vadinar is expected to be delivered from H2 FY2013 onwards.
During the quarter to June 2012, the crude mix comprised 89% heavy and ultra-heavy crudes compared to 66% heavy and ultra-heavy crudes in the same period last year. Despite the increase in heavy and ultra-heavy crudes in its crude mix, the Vadinar refinery continued to optimise the production of higher margin middle and light distillates, which comprised 83% of the total in the June 2012 quarter against 73% in the June 2011 quarter.
During the June 2012 quarter Stanlow achieved throughput of 2.6mmt, which was in line with the expected output for the period. The Stanlow refinery achieved a CP GRM of
3 US$7.53/bbl for the quarter ended June 2012 compared with the IEA North West European benchmark margin of US$4.06/bbl, a premium of US$3.47/bbl.
The crude mix during the quarter comprised 89% light crudes, originating mainly from the UK and Nordic region. The remaining 11% includes heavy and ultra heavy feedstocks and crudes.
Since 30 June 2012, all operating power plant and refineries have performed in line with expectations.
Growth Projects
Since 1 April 2012, we have commissioned the Vadinar refinery optimisation project bringing the current capital expenditure cycle in our refining and marketing business to an end. In power, the 1,200MW Salaya 1 project and unit 1 of Vadinar P2 were commissioned.
There are currently 8 growth projects under active construction as follow: Business Segment Project Location Project Progress % Project Status
Current production c.25,000 scm/day. Reduced to minimise flaring.
1 Line-In Line-Out (‘LILO’) line was completed in Q1 2011 to ensure power evacuation from Mahan 2 Commercial Operations Date (‘COD’) 3 Peak production based on 2P, 2C and best estimate prospective resources.
4 Power and Coal
During the period, commercial operations commenced at Salaya I (unit I) 600MW, in April 2012 and at Salaya I (unit 2) 600MW, in June 2012. On 14 August, unit 1 of Vadinar P2 (255MW) was commissioned. This takes Essar Energy’s operating capacity to 3,055MW.
Salaya I, 1,200 MW
Coal for Salaya I, in Gujarat, is due to come from the Aries coal mine in Indonesia, which was acquired in April 2010. The company received final Pinjam Pakai (forest) approval for the Aries mine on 8 June 2012, and first coal is now expected within the next 12 months. Construction of supporting road and port infrastructure in Indonesia is continuing. Until coal can be supplied from the Aries mine, Salaya I will be supplied with fuel under a contract with Essar Shipping and Logistics Limited, Cyprus.
Certain regulatory approvals are still required from the Indian Government for the dedicated Salaya coal import jetty, near to the power project. Alternative temporary arrangements have been made to import coal from other nearby ports and for onward delivery by road to the Salaya site. The delay in obtaining these regulatory approvals has also impacted construction of a sea water pipeline to meet the plant’s water requirements and temporary arrangements have been made to source water from the nearby Narmada River. While the availability of water in Q1 FY2013 has been a challenge due to the summer period and a delayed monsoon, we continue to pursue options to source adequate water and achieve a full year load factor of 65%.
Mahan I, 1,200 MW
Mahan I, Unit 1 of 600MW is expected to begin commercial operations in September. As previously disclosed, the commissioning of Unit 2, also 600MW, will be linked to the availability of coal.
The Government gave provisional approval at the end of May 2012 for stage 1 forest clearance for the Mahan coal block, which is the captive mine for the Mahan I power station. A formal notification of this approval is expected shortly.
Once we receive confirmation of stage 1 forest clearance, it will still take 15-18 months to produce first coal from the Mahan block. In the meantime, fuel for the Mahan I plant will be supplied from alternative sources. We currently have 215,000 tonnes of domestic e-auction coal at the site and we are also in the process of ordering imported coal.
Essar Energy has also applied for medium term allocations of coal under Coal India’s tapering coal linkage system to provide us with sufficient coal to cover the period until our own mining activities are operational. We are continuing to pursue this application.
Tori I, 1,200MW, and Tori II, 600MW
The Tori I and Tori II projects in Jharkhand state are due to be completed by March 2014. As at the end of July 2012, Tori I was 40% complete and Tori II 16% complete. Coal for these projects will be supplied from the nearby captive coal blocks at Chakla and Ashok Karkata. Essar Energy is currently awaiting forest clearance and environmental consents from the Indian Government in order that mining operations can begin. These delays in securing approvals will require alternative sources of coal to be obtained in the first year. As required, e-auction coal will be purchased to provide fuel for this project and an application has also been made for coal under the tapering coal linkage system.
5 Later stage power projects
As announced in February 2012, due to regulatory delays in the Indian power sector, and to ensure efficient deployment of capital, Essar Energy has decided to progress the construction of three of its later stage power projects at Salaya II, Salaya III and Navabharat I, totalling 2,970MW, which were due to be commissioned in 2014, only against certain milestones. The total investment cost of the three projects is c.US$3.1 billion.
Refining and Marketing - India
In Refining and Marketing, Vadinar refinery’s Phase I optimisation project, which involved conversion of a Visbreaker Unit into a modified Crude Distillation Unit to process indigenous crude, was completed on 5 June 2012, four months ahead of its planned completion. Post completion of this project, the refinery has achieved total refining capacity of 405,000bbl/day (20 MMTPA) at a complexity of 11.8.
Refining and Marketing - UK
Essar Energy completed the acquisition of the Stanlow refinery, UK, on 31 July 2011.
The company continues to progress initiatives to enhance gross refining margins at Stanlow. These include a significant broadening of the number of crude oils processed, including lower cost crudes, together with improvements to the product mix, energy efficiencies and some operational cost savings.
Work continues to install a natural gas supply into Stanlow to fuel the six boilers on site, which are currently run on fuel oil. This initiative is expected to be completed by the end of 2012, to deliver significant environmental benefits and improve margins. The task of installing a 3km, 12 inch diameter pipeline to transport the gas is now well advanced.
It is expected that these, and other initiatives, will deliver approximately US$1 per barrel of margin benefits in the current financial year and a further US$1 in FY2014, with the potential of a further US$1 thereafter. These improvements will ensure that Stanlow will be net cash positive even when market conditions are at the bottom of the cycle and will provide attractive returns through the market cycle.
On 25 July 2012, Essar Energy announced that it had concluded new oil and product inventory arrangements for Stanlow refinery with Barclays Bank plc. Under the new arrangements, Barclays purchased the inventories of crude oil and petroleum products at Stanlow, and now hold those inventories, supplying crude to the refinery in line with its requirements. The new arrangements have allowed Essar Oil UK to repay its previous working capital revolving credit facility. In addition, they allow Essar Oil UK to reduce its costs and also permit greater operational flexibility. The customer relationships and product sale processes remain with Essar Oil UK.
On 25 July 2012, Essar Energy paid the second and final instalment of the consideration due to Shell for the purchase of the Stanlow refinery, which was completed on July 31 2011. This second instalment was for US$175 million plus interest totalling US$183.3 million and the first instalment, which was paid on completion, was for US$175 million.
Exploration and Production
Essar Energy has the largest acreage of coal bed methane blocks in India, with approximately 10 trillion cubic feet (unrisked) of gas resources in-place across five CBM blocks.
6 Current production at the Raniganj CBM block is around 25,000 standard cubic metres of gas per day (scm/d), reduced to minimise flaring, while test sales through a pipeline to the Durgapur industrial estate are continuing. Subject to all clearances being received, plateau production of c.3 million scm/day is expected in the second half of 2013. A provisional gas price for test sales of US$5.25/mmbtu plus US$1.00/mmbtu for transportation charges has been approved by the Government of India for incidental gas produced during phase II. The Grant Order for the Mining Lease (from the State Government of West Bengal), allowing commercial sales to proceed, was secured on 29June 2012. The Government of India is now in the process of making a decision on the full commercial sales price for Raniganj and other CBM developers in India. As part of this process, Essar Energy completed a gas price discovery exercise in August 2011.
To date, Essar Energy has consents to drill up to 256 wells (consisting of main vertical and directional support wells), of which 80 have now been drilled. Environmental approval for the Full Field Development, of up to 500 wells is progressing well, with the Public Hearing associated with this having taken place at the end of May. The full field development plan has already been approved by the Director General of Hydrocarbons (DGH).
Essar Energy has also announced its intention to introduce strategic partners in certain blocks to help manage risk and to allow it to focus on its core assets. On 2 July 2012, Essar Energy announced that it had agreed to sell a 50 per cent stake in Vietnam's offshore gas exploration block 114 to ENI International B.V.
Essar Energy acquired the 100 per cent stake in block 114 in 2007 and a production sharing contract with the Vietnam Government became effective in 2010. Further investment is required to establish gas reserves in the block and no gas is being produced at present. Under the terms of the transaction, ENI is also assuming operator status for the block.
The transaction is subject to agreement from the Vietnam Government.
Sales Tax Incentive
The Hon’ble Supreme Court of India, on 17 January 2012, set aside the judgment of the Gujarat High Court and sales tax collected by Essar Oil became payable immediately. Subsequently, Essar Oil received demand notices from the Gujarat Government for repayment of the full amount of sales tax deferment benefit of Rs.61.69 billion (US$1,095.6 million) along with interest.
Subsequently, Essar Oil filed a writ petition with the Hon’ble Gujarat High Court seeking remission of the whole amount of interest on the tax amount payable and also to allow Essar Oil to pay the tax amount without interest in instalments. The Hon’ble High Court of Gujarat on 25 June 2012 dismissed the writ petition.
A Special Leave Petition (‘SLP’) was filed before the Hon’ble Supreme Court of India on 10 July 2012 for payment of the sales tax liability in instalments and remission of interest. The Hon’ble Supreme Court on 17 July 2012 directed Essar Oil to pay Rs. 10 billion (c.US$ 177.6 million) towards the Sales Tax dues to the State of Gujarat by 31 July. Following payment of the Rs. 10 billion (US$177.6 million) the coercive steps taken by the State of Gujarat remain stayed. The next court hearing is scheduled for 23 August 2012.
Following the quarter end, on 23 July 2012, Essar Energy announced that Essar Oil had secured a new 7 year credit facility with its Indian banks of up to Rs.50 billion (c.US$900 million) to meet the deferred sales tax liability of Rs.61.69 billion (c.US$1,095.6 million) owed to the Government of Gujarat.
7 CDR Exit
On August 9 2012, Essar Oil announced that it had reached agreement with its lenders to exit from a Corporate Debt Restructuring (CDR) loan facility set up in December 2004 which facilitated the construction of its Vadinar refinery in Gujarat. The CDR facility will be replaced with a new Rs.94 billion (c.US$1.7 billion) debt facility on mutually acceptable commercial terms from a similar group of lenders.
In May 2012, Essar Energy refinanced a US$450 million bridge loan which was due December 2012 with a new US$300 million 3 year secured loan facility and US$150 million of internal cash resources. Separately, Essar Energy has also signed a US$250 million 3.5 year subordinated unsecured loan facility with Essar Global Limited for general corporate purposes to ensure adequate liquidity within Essar Energy.
At the end of June 2012, Essar Energy had underlying gross debt (excluding working capital loans) of US$6,217 million and underlying net debt of US$5,822 million, which is in line with our plans. The underlying net debt at the 31 March 2012 was US$6,273 million. While there has been no major movement in the underlying net debt since 31 March 2012 the underlying net debt movement is primarily due to the 10% depreciation of the Rupee against the US dollar in the quarter which has reduced the dollar value of Indian Rupee loans..
Source: Essar Energy