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The Dissolution of Motiva Enterprises, the Third Largest Oil & Gas Refiner on the Gulf Coast

Motiva Enterprises LLC (“Motiva”) is a joint venture between Royal Dutch Shell PLC (“Shell”) and Saudi Arabian Oil Company (“Saudi Aramco”), through its subsidiary, Saudi Refining Inc. ((Press Release, Shell, Saudi Refining, Inc. and Shell sign letter of intent to separate Motiva assets (Mar. 16, 2016), http://www.shell.com/media/news-and-media-releases/2016/saudi-refining-inc-and-shell-sign-letter-of-intent-to-separate-motiva-assets.html.)) The joint venture was formed in 1998 and became a 50/50 joint venture between Saudi Aramco and Shell in 2002 when Chevron Corp. exited the venture as part of a settlement with regulators while acquiring Texaco Inc. ((Javier Blas, Joe Carroll, and Margot Habiby, Saudi Aramco to Pay Shell $2.2 Billion in Refinery Breakup, Bloomberg (Mar. 7, 2017), https://www.bloomberg.com/news/articles/2017-03-07/saudi-aramco-and-shell-agree-on-terms-of-motiva-asset-breakup.))

Motiva owns and operates three refineries in Convent and Norco, Louisiana, and Port Arthur, Texas, with a combined refining capacity of about 1.1 million barrels of oil per day. ((Motiva, http://www.motivaenterprises.com/ (last visited Apr. 5, 2017).)) The Port Arthur Refinery is the largest refinery in the United States and has a capacity of 600,000 barrels per day and the two Louisiana refineries have a total capacity of 465,000 barrels per day. ((Andrew Ward and Anjli Raval, Saudi Aramco and Shell finalise terms to unwind US partnership, Financial Times (Mar. 7, 2017), https://www.ft.com/content/09398c2a-031b-11e7-aa5b-6bb07f5c8e12.)) Additionally, Motiva operates 34 refined products terminals throughout the United States and markets refined products in 26 states and the District of Columbia. ((Motiva, supra note 3.)) On March 16, 2016, Saudi Aramco and Shell announced they had signed a letter of intent to dissolve Motiva. ((Shell, supra note 1.))

Dissolution Terms

Through the dissolution, Saudi Aramco will gain the Motiva name and entity, the Port Arthur refinery, 24 distribution terminals, and the exclusive right to sell Shell-branded gasoline and diesel in Georgia, North Carolina, South Carolina, Virginia, Maryland, Washington, D.C., eastern Texas, and the majority of Florida. ((Blas, supra note 2.)) Shell will receive the Norco and Convent refineries, 11 distribution terminals, and the exclusive right to sell Shell-branded gasoline and diesel in Alabama, Mississippi, Tennessee, Louisiana, the Florida panhandle, and the Northeast. ((Id.))

As part of the dissolution, Saudi Aramco will pay Shell a $2.2 billion balancing payment to compensate for the difference in the value of the assets, which includes the assumption of debt. ((Id.)) The balancing payment includes Saudi Aramco assuming $1.5 billion of Shell’s share of Motiva’s debt and also includes a payment of $700 million in cash from Saudi Aramco to Shell. ((Ward, supra note 4.)). Shell will only assume $100 million of Motiva’s $3.2 billion of debt in the split. ((Id.))

Port Arthur Refinery Expansion Troubles

In April 2012, Motiva unveiled its 5-year, $10 billion expansion to the Port Arthur refinery, which increased capacity to 600,000 barrels per day. ((Erwin Seba, TIMELINE-Troubles plague Motiva’s Port Arthur refinery, Chicago Tribune (Aug. 13, 2013), http://articles.chicagotribune.com/2013-08-21/news/sns-rt-refinery-timelinemotiva-portarthur–timeline-20130821_1_new-crude-unit-delayed-coking-unit-motiva.)) The expansion included a new 325,000 barrel per day distillation unit which experienced significant operational issues since coming into operation. ((Id.)) The initial expansion of the refinery from 285,000 to 600,000 barrels per day was expected to cost $5 billion; the project eventually became Saudi Aramco’s largest outside of Saudi Arabia. ((Id.))

Dissolution is favorable to both parties

Saudi Aramco is preparing to IPO 5% of its stock which has been valued by Saudi Arabia at $2 trillion and would make Saudi Aramco the world’s largest company in market capitalization. ((Ben Moshinsky, Saudi Aramco might be worth just half of the $2 trillion suggested by Saudi officials, Business Insider (Apr. 4, 2017), http://www.businessinsider.com/ft-saudi-aramco-ipo-value-one-trillion-2017-4?r=UK&IR=T.))  Many believe that by expanding its downstream presence Saudi Aramco will be more attractive to investors in its IPO. ((Ward, supra note 4.)) Saudi Aramco’s downstream vice president Abdulaziz Al-Judaimi stated, “this transaction is well aligned with Aramco’s global downstream strategy.” ((Martin Baccardax, Shell Deal Hands Biggest U.S. Oil Refinery to Saudi Aramco, TheStreet (Mar. 7, 2017), https://www.thestreet.com/story/14029565/1/shell-deal-hands-biggest-u-s-oil-refinery-to-saudi-aramco.html.)) Saudi Aramco hopes to make Motiva a major competitor in the downstream sector in the United States. ((Tsvetana Paraskova, Shell Gives Up Largest US Refinery To Saudi Aramco, Oilprice.com, (Mar. 7, 2017), http://oilprice.com/Latest-Energy-News/World-News/Shell-Gives-Up-Largest-US-Refinery-To-Saudi-Aramco.html.)) Saudi Aramco also hopes that expanding its refining presence will ensure a market for its own oil. ((Erwin Seba and Roslan Khasawneh, Shell expects to split Motiva assets with Saudi Aramco in Q2, Nasdaq, (Mar. 7, 2017, 5:29 AM), http://www.reuters.com/article/us-global-oil-idUSKBN1AQ01H.))

Further, Shell has pledged to sell $30 billion of assets by the end of 2018 following its acquisition of BG Group. ((Ward, supra note 4.)) Shell is focused on selling assets to reduce its increased debt load. ((Blas, supra note 2.)) Shell also views the dissolution of Motiva as a way to simplify its corporate structure. ((Seba & Khasawneh, supra note 19.)) Shell’s downstream director, John Abbott, stated that “Motiva’s performance has been transformed in the last two years” and a simplified structure is “consistent with both the Group and Downstream strategy to provide simpler and more highly integrated businesses which deliver increased cash and returns.” ((Shell, supra note 1.))

Overall, each of the companies walks away from the Motiva joint venture with valuable assets on the U.S. Gulf Coast and each is well positioned to achieve its corporate objectives. While the Port Arthur expansion project proved to challenge Motiva, the refinery is now the focal point of Saudi Aramco’s downstream operations in the United States.