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The dark secrets of the trillion-dollar oil trade |
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Monday, 28 September 2009 |
 With a combined capacity for 313,000 tonnes of oil, the Delta Ios and the NS Burgas supertankers were launched two months ago to criss-cross the globe in search of trade. Instead,
the vast vessels were to be found yesterday lying idle off the coast of
Singapore after their owners were paid by two of the world's richest
and most secretive oil companies to turn them into floating
petrochemical warehouses.
At first glance, the decision by Trafigura Group and Vitol Holding BV
to charter the newly built ships at an estimated cost of £47,000 a day
to do nothing for up to four months in South-east Asia while laden with
cargos of diesel worth at least £77m per vessel makes little economic
sense.
When this is combined with the fact that the Delta Ios and the NS
Burgas are just two ships in an enormous fleet of tankers which are
currently being paid about £80m a month by independent oil traders like
Trafigura and Vitol, as well as giants such as Shell, to stay anchored
around the globe with anything between 50 and 150 million barrels of
redundant crude on board, it seem that the ruthless barons of black
gold must be losing money as fast as they can make it.
Far from it. The phenomenon of "floating storage", which has been
brought about by a huge over-supply of global tanker capacity and
unusual market conditions, is just one example of the multitude of ways
in which a small group of private, mostly Swiss-based companies have
become adept at turning vast profits from the closed and often murky
world of independent oil trading. A glut of oil caused by the recession
means that crude available for immediate purchase is currently cheaper
than that bought on longer-term or "future" contracts – a practice
known as "contango". The result is that independent traders have been
rushing to buy the cheaper "spot" oil and storing it wherever they can
– namely in under-employed tanker fleets – in anticipation of a sharp
rise in price as the global economy begins to recover. The resulting
profit can be anything between 15 and 20 per cent – tens of millions of
dollars – even after the cost of hiring a tanker is deducted.
It is a situation which prompted one senior oil company executive to
declare that the spring and summer of 2009 represented "blessed times
for trading". Another oil trader told The Independent: "Contango has
been a real boon. The independents have become very adept at buying up
tanker capacity as cheaply as possible, sitting on the stock and
selling it on via arbitrage. They've been as slick as you like."
The deals are part of a world in which discretion and an ability to
keep out of the public eye have long been treasured. While the oil
majors such as ExxonMobil, Shell and BP operate as global corporations,
the independents or "jobbers" have thrived in the grey zone of fast
trading-room deals and personal contacts that allow access to lucrative
oil reserves.
But increasingly the activities of the "big four" independent traders –
Trafigura, Vitol, Russian-owned Gunvor (which has consistently denied
reports that it is linked to the Russian Prime Minister, Vladimir
Putin) and the hugely successful Glencore – are coming under scrutiny.
Questions are being asked about their role in uniting the oil wealth of
some of the world's more unsavoury regimes with the open market.
Trafigura, which until August 2006 was barely known outside the oil
trade – despite growing to become one of the world's biggest companies
with a turnover of $73bn (£46bn) since it was founded 16 years ago –
last week found itself making headlines around the world when it agreed
to pay about £30m to thousands of residents of the Ivory Coast port of
Abidjan who fell ill after toxic oil waste from a ship chartered by the
company was dumped by a sub-contractor near the west African city.
The settlement of the claim brought on behalf of 31,000 Ivorians at the
High Court in London after tonnes of foul-smelling sludge were
fly-tipped in August 2006 was said by Trafigura to vindicate its
position that there was no link between the waste and people who died
or suffered serious illnesses.
But the Abidjan pollution disaster shone a light into the nature of the
way these multibillion-pound "jobbers" of the oil trade make their
money. In the case of Trafigura, the events of August 2006 were just
part of a deal conducted across three continents in which a cheap,
low-quality form of oil known as coker gasoline bought from a Mexican
refinery was further refined in Europe, and the subsequent fuel was
sold at a profit of about $7m per cargo.
Oil industry insiders have told The Independent that coker gasoline is
just one of a myriad of methods used by independent traders to turn a
profit, ranging from "paper" deals struck in the City of London's
trading floors, to floating storage, to what is known as "physical
trading" – transporting hundreds of consignments of different grades of
oil on chartered tankers looking for the best price from dozens of
offices across the globe. Executives, who are frequently equity
partners in the companies, speak of constant shuttling around the world
to close deals and negotiate prices.
By any standards, it is a huge and profitable industry. From a
situation 20 years ago where the "majors" dominated the international
trade, independents now account for about 15 per cent of world's $2
trillion oil industry.
Glencore, founded in 1974 by the controversial trader Marc Rich – who
was indicted for tax evasion and later pardoned by President Bill
Clinton – is estimated to supply 3 per cent of the world's daily oil
consumption. The company is no longer involved with Mr Rich.
Between them, the "big four" had turnovers last year of about $415bn –
equivalent to the GDP of Austria. Because the companies are privately
owned, comprehensive profit figures are hard to come by, but Glencore
announced a profit of $4.75bn for 2008. Trafigura made $440m last year.
In an industry which deals with a commodity for which many countries
have gone to war, insiders say it is inevitable that traders will find
themselves dealing with authoritarian oil-rich regimes and dabbling in
controversial schemes. On at least one occasion, three of the big four
– Glencore, Trafigura and Vitol – have been found to have crossed the
line between incentives and kickbacks through their involvement in the
United Nations' oil-for-food scheme to help Saddam Hussein's Iraq buy
humanitarian supplies.
In the UN's Volcker report, all three companies were cited for paying
surcharges demanded by Saddam's regime to win oil supply contracts. In
2007, Vitol pleaded guilty in America to paying $13m in surcharges, and
the Swiss arm of Trafigura forfeited $20m. Both companies insisted that
the deals had been handled in good faith via third parties. Glencore,
which was cited for paying $6.6m in surcharges, denied any wrongdoing.
Glencore was also named in a 2005 High Court judgment as one of the
companies which handled shipments of oil sold by the state-owned oil
company of Congo-Brazzaville in central Africa. It was subsequently
shown that cash derived from the shipments was used by the son of the
country's President to pay credit card bills for shopping sprees in
Paris. There was no suggestion that Glencore acted improperly.
All of the "big four" point out that they operate in accordance with
international law and the Organisation for Economic Co-operation and
Development's guidelines on business conduct. But campaigners complain
that a lack of transparency in the industry means that proper scrutiny
of the oil-rich governments in Africa and the middlemen they deal with
is impossible.
Gavin Hayman, director of campaigns for Global Witness, said: "These
companies play a major role in selling Africa's oil and their
operations are notoriously opaque. It would be legitimate to ask: 'How
do they get these contracts, do they sell the oil for its proper price,
and do they send the money back to the correct place?'
"This lack of transparency creates a big risk that corrupt officials
can siphon off some of the profits and deprive ordinary citizens of
their rightful benefit from natural resource wealth."
Source: The Independent
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