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, US$110 million from the private equity-backed NARL Refining for its alleged failure to properly manage and maximize profits from the Come-by-Chance plant in Newfoundland.
NARL filed a counter arbitration claim along with two lawsuits accusing BP — which is the refinery's sole supplier under a two-year 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 officer 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 US domestic crudes, calling it an "industry-wide" issue.
In a second federal suit, this one filed in Texas, NARL alleges BP interfered with its plans to secure a hedging program, costing it at least $10 million, and scuppered plans to extend a vital financing deal with Citigroup Energy Canada.
NARL says in court filings that BP sent several letters to Citigroup — which is a party to the supply and offtake agreement — falsely accusing the refinery owners of mismanaging the plant; it says the correspondence was in an effort to thwart financing negotiations and impose its will on the refinery owners.
BP counters in filings that the supply agreement required them to notify Citigroup of their concerns about NARL's management of the refinery.
Citigroup declined to comment.