Wall Street vets bat­tle BP in fall­out over Canada re­fin­ery

The Pak Banker - - MARKETS/SPORTS -

A le­gal bat­tle be­tween a team of for­mer Wall Street oil traders and be­he­moth pro­ducer BP plc over a re­mote Cana­dian re­fin­ery sheds rare light on the murky world of crude trad­ing.

The first salvo in the pre­vi­ously un­re­ported dis­pute was fired by BP in De­cem­ber. The oil com­pany de­manded, through ar­bi­tra­tion, $110 mil­lion from the pri­vate equity-backed NARL Refining for its al­leged fail­ure to prop­erly man­age and max­i­mize prof­its from the Come- byChance plant in New­found­land.

NARL filed a counter ar­bi­tra­tion claim along with two law­suits ac­cus­ing BP - which is the re­fin­ery's sole sup­plier un­der a twoyear con­tract - of pro­vid­ing va­ri­eties of crude that ben­e­fit its trad­ing book but hurt the re­fin­ery's equip­ment and prof­its.

The dis­pute could jeop­ar­dize the on­go­ing op­er­a­tion of the 115,000 bar­rel per day (bpd) re­fin­ery. It also ex­poses a rift in the rough-and-tum­ble global oil mar­ket, where dis­putes of­ten are han­dled qui­etly to avoid com­pro­mis­ing long-term re­la­tion­ships or re­veal­ing trad­ing strate­gies.

"Dis­agree­ments among par­ties in sup­ply con­tracts are not un­com­mon, but we don't typ­i­cally see th­ese con­flicts out in the open," said Ed Hirs, an en­ergy econ­o­mist at the Univer­sity of Hous­ton. "That's why th­ese con­tracts call for dis­putes to go to ar­bi­tra­tion, keep­ing it out of pub­lic view."

BP and NARL Refining de­clined to com­ment. Hirs said con­tracts in­clude ne­go­ti­ated terms that ma­jors such as BP would pre­fer to keep pri­vate. The al­le­ga­tion that BP put its in­ter­est over those of a client could also hurt busi­ness, he said.

The re­fin­ery's oper­a­tors are Sil­verPeak Fi­nan­cial Part­ners, a group of Wall Street veter­ans, in­clud­ing Neal Shear, who helped build Mor­gan Stan­ley's oil trad­ing divi­sion; Kaushik Amin, for­mer chief ex­ec­u­tive offi- cer of RBS Sem­pra Com­modi­ties and global head of liq­uid mar­kets for Lehman Brothers; and Harsh Ramesh­war from Mer­rill Lynch Com­modi­ties.

Al­though they're ex­pe­ri­enced trad­ing oil, they be­gan refining it when they pur­chased the plant for an undis­closed price from South Korea's na­tional oil com­pany 18 months ago. They are up against BP, one of the world's largest pro­duc­ers, which sup­plies its own re­finer­ies and se­lect third-party as­sets around the globe.

The high-stakes feud cen­ters on what is the best slate of crudes to run through Come-by-Chance - and how that should be de­ter­mined. There are dozens of va­ri­eties of crude in the world, each with its own char­ac­ter­is­tics, and a re­fin­ery's prof­its and op­er­a­tions can vary widely de­pend­ing on choice.

The dis­pute be­gan qui­etly in De­cem­ber with ar­bi­tra­tion in New York. BP ar­gued that NARL was fail­ing to live up to the terms of the sup­ply con­tract, ac­cord­ing to court records. Typ­i­cally, ar­bi­tra­tion fil­ings are not pub­lic. But the dis­pute spilled into the open when NARL went to a fed­eral court in New York to seek to freeze the busi­ness re­la­tion­ship pend­ing a res­o­lu­tion of the ar­bi­tra­tion.

The "tolling" con­tract at is­sue is a rou­tine ar­range­ment for in­de­pen­dent re­finer­ies that lack the trad­ing op­er­a­tions and credit lines nec­es­sary to op­er­ate ef­fec­tively in the global mar­ket. There is no dis­pute that BP was to sup­ply crude to the re­fin­ery and take back roughly 82 per­cent of the re­fined fu­els, such as gaso­line, diesel and jet fuel, pay­ing NARL a fixed "toll" of $9.45 per bar­rel on the first 90,000 bar­rels of oil put through each day.

NARL earns a higher profit on oil re­fined in ex­cess of 90,000 bpd, termed "mer­chant bar­rels," BP says in its ar­bi­tra­tion fil­ing. The oil com­pany al­leges NARL ran the re­fin­ery at more than 90,000 bpd to cap­i­tal­ize on the in­cen­tive - even when it was not eco­nom­i­cally ad­van­ta­geous to do so. This came "at the ex­pense of both the Re­fin­ery's gross mar­gin and [BP's] le­git­i­mate ex­pec­ta­tions for ben­e­fit un­der the con­tract," BP said in court doc­u­ments.

In a coun­ter­claim, NARL seeks to end the con­tract. Early on, NARL says in court doc­u­ments, it de­ferred to BP in man­ag­ing the crude slate. But as the months rolled on, the new own­ers say in fil­ings, they be­gan to make de­ci­sions in­de­pen­dent of BP.

NARL al­leges that BP made only lesser grades avail­able, re­sult­ing in "sig­nif­i­cant and long-term dam­age" to re­fin­ery equip­ment, in­clud­ing a vac­uum tower that had to be shut down abruptly last the fall. The light crudes con­tain higher lev­els of as­phaltenes, a tar-like sub­stance that can clog lines and pipes, NARL ar­gued. As ev­i­dence, NARL sub­mit­ted a BP pre­sen­ta­tion that ac­knowl­edged the as­phaltenes prob­lem with U.S. do­mes­tic crudes, call­ing it an "in­dus­try-wide" is­sue.

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