January 10, 2022 [OilPrice] – Shell and Pemex have nearly finalized the $596mn deal to hand over control of the 340,000 b/d Deer Park, Texas, refinery to Mexico’s oil firm, but a legal challenge seeking to stop the deal could present new hurdles.
Pemex’s bid to purchase the 50.005pc it does not already own in the refinery was announced in May. It would allow Shell to maintain control of the onsite chemicals plant at Deer Park, a 2,300-acre facility near Houston.
The companies are about 90pc finished with work separating operations between the refinery and the chemical plant, as part of a $30mn transition plan steered by Shell, the company said in testimony submitted in the US District Court for the Southern District of Texas on 4 January.
Pemex’s plan to purchase control of Deer Park faced scrutiny from US lawmakers and regulators throughout 2021, drawing fierce opposition from a local congressman and a months-long review from the Committee on Foreign Investment in the US that caused the companies to miss an initial fourth quarter 2021 target to wrap the deal.
A legal complaint from a group of New York-based laundromat owners marks the latest challenge. Aaron Hagele and Andrew Sarcinella, owners of a laundromat in Mt Vernon, New York, filed a lawsuit in December seeking to stop the sale based on the argument that it will reduce competition in the US gasoline market, leading to higher prices for retail consumers and business owners across the country. The plaintiffs are seeking a legal enjoinder that would restrain the companies from completing the deal over antitrust concerns.
If they succeed in convincing a Houston judge that the sale would violate antitrust laws, Shell and Pemex will face financial, operational and labor-related headaches in coming weeks and months, Shell deal implementation leader Kristen Bergeron said in testimony submitted in the case.
“Should closing be delayed, Shell will be required to spend additional money to maintain systems stuck in limbo and will likely also have to repeat work that has already been done in anticipation of closing,” Bergeron said.
An enjoinder would also threaten the companies’ relationship with workers. Shell’s current collective bargaining agreement with the United Steel Workers (USW) expires on 31 January, and the company still needs time following the sale’s conclusion to wrap up a new agreement covering the chemicals plant. PMI Services North America (PMI), Pemex’s subsidiary in the US taking over the facility, also needs to iron out a successorship agreement with the union covering refinery workers.
A spokesperson for the local USW chapter representing Deer Park workers did not respond to a request for comment.
PMI has its own financial worries to consider. Delaying the deal “beyond the third week of January” would increase “risk to the transaction,” PMI president Manuel Flores Camacho said in testimony submitted in the laundromat lawsuit.
PMI has agreed on a $500mn bridge loan with a consortium of banks that would partially fund the purchase price and give the group working capital, Camacho said. But delaying the deal would trigger clauses in that agreement forcing the company to either prepay the outstanding loan or to pay certain fees, adding to the $33mn the company expects to pay for legal fees, new payroll and software subscription costs connected to the sale in coming days.
Besides the purchase price, Pemex expects to assume around $907mn in debt, interest and prepayment fees owed by Deer Park after the deal wraps. Financial resources for the transaction will come from Mexico’s national infrastructure fund, according to a Pemex presentation on 22 December.
Despite the companies’ concerns, the laundromat plaintiffs may have a longshot chance at obtaining the temporary restraining order sought in the lawsuit, according to subject matter experts providing testimony on behalf of Shell and PMI.
The plaintiffs’ claims that the deal would cause higher gasoline prices overstates the refinery’s connection to prices consumers pay at the pump, in part by ignoring the role retail operators and distributors play in setting prices, said Ramsey Shehadeh, managing director of National Economic Research Associates.
“The transaction in question involves the sale of Shell’s interest in the Deer Park refinery, with no downstream or distribution assets involved, and thus no sales to ‘consumers of gasoline in the United States,'” Shehadeh said in testimony.
While plaintiffs have argued the deal would exacerbate gasoline prices that reached multi-year highs in 2021, the retail sector could be a more relevant place to look for why consumers paid dearly at the pump last year. Federal Trade Commission chair Lina Khan called out “price coordination and other collusive practices” occurring in the retail sector last year, and gains in US retail margins increased as refining margins decreased late in 2021.
US retail gasoline margins averaged 72¢/USG in December, marking the highest monthly figures in over a year, US investment bank Tudor Pickering Holt said in a research note published 30 December.
But despite year-high figures in retail margins, refining margins waned in the last month of 2021. Average 3-2-1 crack spreads in the US Gulf coast were $16.87/bl in December, down sharply from $19.63/bl in October, perhaps providing evidence that retail prices have detached somewhat from refining economics amid supply chain issues and logistical factors.
The US District Court in Houston will today hear arguments in the laundromat complaint and potentially rule on the proposed restraining order.
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