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By Jarrett Renshaw and Jessica Resnick-Ault
NEW YORK, March 7 (Reuters) - A legal battle between a teamof former Wall Street oil traders and behemoth producer BP plc over a remote Canadian refinery sheds rare light on themurky world of crude trading.
The first salvo in the previously unreported dispute wasfired by BP in December. The oil company demanded, througharbitration, $110 million from the private equity-backed NARLRefining for its alleged failure to properly manage and maximizeprofits from the Come-by-Chance plant in Newfoundland.
NARL filed a counter arbitration claim along with twolawsuits accusing BP - which is the refinery's sole supplierunder a two-year contract - of providing varieties of crude thatbenefit its trading book but hurt the refinery's equipment andprofits.
The dispute could jeopardize the ongoing operation of the115,000 barrel per day (bpd) refinery. It also exposes a rift inthe rough-and-tumble global oil market, where disputes often arehandled quietly to avoid compromising long-term relationships orrevealing trading strategies.
"Disagreements among parties in supply contracts are notuncommon, but we don't typically see these conflicts out in theopen," said Ed Hirs, an energy economist at the University ofHouston. "That's why these contracts call for disputes to go toarbitration, keeping it out of public view."
BP and NARL Refining declined to comment.
Hirs said contracts include negotiated terms that majorssuch as BP would prefer to keep private. The allegation that BPput its interest over those of a client could also hurtbusiness, he said.
The refinery's operators are SilverPeak Financial Partners,a group of Wall Street veterans, including Neal Shear, whohelped build Morgan Stanley's oil trading division; KaushikAmin, former chief executive officer of RBS Sempra Commoditiesand global head of liquid markets for Lehman Brothers; and HarshRameshwar from Merrill Lynch Commodities.
Although they're experienced trading oil, they began refiningit when they purchased the plant for an undisclosed price fromSouth Korea's national oil company 18 months ago. They are upagainst BP, one of the world's largest producers, which suppliesits own refineries and select third-party assets around theglobe.
The high-stakes feud centers on what is the best slate ofcrudes 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 andoperations can vary widely depending on choice.
The dispute began quietly in December with arbitration inNew York. BP argued that NARL was failing to live up to theterms of the supply contract, according to court records.Typically, arbitration filings are not public. But the disputespilled into the open when NARL went to a federal court in NewYork to seek to freeze the business relationship pending aresolution of the arbitration.
The "tolling" contract at issue is a routine arrangementfor independent refineries that lack the trading operations andcredit lines necessary to operate effectively in the globalmarket. There is no dispute that BP was to supply crude to therefinery 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 oilput through each day.
NARL earns a higher profit on oil refined in excess of90,000 bpd, termed "merchant barrels," BP says in itsarbitration filing. The oil company alleges NARL ran therefinery at more than 90,000 bpd to capitalize on the incentive- even when it was not economically advantageous to do so. Thiscame "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 thecrude slate. But as the months rolled on, the new owners say infilings, 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 refineryequipment, including a vacuum tower that had to be shut downabruptly last the fall. The light crudes contain higher levelsof asphaltenes, a tar-like substance that can clog lines andpipes, NARL argued.
As evidence, NARL submitted a BP presentation thatacknowledged the asphaltenes problem with U.S. domestic crudes,calling it an "industry-wide" issue.
In a second federal suit, this one filed in Texas, NARLalleges BP interfered with its plans to secure a hedgingprogram, costing it at least $10 million, and scuppered plans toextend a vital financing deal with Citigroup Energy Canada.
NARL says in court filings that BP sent several letters toCitigroup - 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 financingnegotiations and impose its will on the refinery owners.
BP counters in filings that the supply agreement requiredthem to notify Citigroup of their concerns about NARL'smanagement of the refinery.
Citigroup declined to comment. (Reporting By Jessica Resnick-Ault and Jarrett Renshaw; Editingby Jonathan Leff and Lisa Girion)
