Oil Manipulation Inquiry Shows EU’s Hammer After Libor

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A customer fills an automobile at the fuel pump of a gas station, operated by Statoil Fuel & Retail ASA, in Malmo, Sweden. Close

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A customer fills an automobile at the fuel pump of a gas station, operated by Statoil Fuel & Retail ASA, in Malmo, Sweden.

Statoil ASA (STL) sold a tanker of Norwegian crude valued at about $63 million to BP Plc on May 9. The deal, along with six others so far this month, wasn’t subject to any oversight by financial authorities, yet would help establish the price for more than half the world’s oil.

Trading in oil cargoes from the North Sea set benchmark prices published by Platts, a unit of McGraw Hill Financial Inc., that ultimately help determine the amount refiners pay for crude, which in turn affects what consumers pay for gasoline and diesel fuel. Last week, Europe’s top antitrust official barged into this lightly regulated corner of the market, raiding the offices of Royal Dutch Shell Plc (RDSA), BP and Statoil, and requesting records from some of Europe’s biggest trading houses, including Vitol Group, Gunvor Group Ltd. and Glencore Xstrata Plc.

The investigation targets possible collusion to manipulate benchmark energy assessments reported by Platts. The probe is being led by European Union Competition Commissioner Joaquin Almunia, who also is pursuing price-fixing allegations related to the London interbank offered rate, or Libor, and in the market for credit derivatives. Commodities regulators have little authority to police price-reporting companies.

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Valve wheels are seen on pipework outside the Troll A offshore gas platform, operated by Statoil ASA, in the North Sea near Bergen, Norway. Close

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Valve wheels are seen on pipework outside the Troll A offshore gas platform, operated by Statoil ASA, in the North Sea near Bergen, Norway.

“They have a hammer, and they’re going around looking for nails to pound with it,” Craig Pirrong, director of the University of Houston’s Global Energy Management Institute, said by phone last week. “Libor showed them how powerful a hammer they had, and in particular it showed them what can happen when you get access to company records. It’s amazing the kinds of things you can find there.”

Pricing Probes

Pricing mechanisms are under scrutiny around the world after U.S and U.K. investigators uncovered widespread attempts by banks to manipulate Libor, the benchmark lending rate tied to $300 trillion in securities worldwide. Royal Bank of Scotland Group Plc, UBS AG and Barclays Plc (BARC) have been fined $2.5 billion and at least a dozen firms remain under investigation. Regulators are also looking for evidence of price fixing in ISDAfix, the benchmark rate for the $379 trillion swaps market.

“This is nothing like Libor,” Adrian Binks, chairman of Argus Media Ltd., a reporting company and Platts competitor in London, said in an e-mail May 20. “Price reporting agencies are independent companies that compete with each other. It’s really industry’s choice to use our quotations. We’re not receiving money for the trades. We’re not like the banks.”

Independent Reviews

The price-reporters said they ordered independent reviews of their methods after calls by regulators last year to safeguard against market manipulation. Platts’s will start in June and be completed this year. Argus and Reed Business Information’s ICIS said their evaluations would be completed by October. The process, which preceded and is separate from the EU inquiry, will examine whether the reporters comply with their own stated assessment methods, the companies said this week.

The appraisals are a response to calls by international regulators for “robust” controls to prevent manipulation and distortion of wholesale prices for commodities from crude to gasoline. Auditors will assess whether the reporting companies have adhered to principles set out last October by the International Organization of Securities Commissions. The Madrid-based group, which brings together regulators from more than 100 countries, said that benchmark assessments are vulnerable to manipulation.

“A review by an external auditor as called for by the IOSCO principles will demonstrate to regulators the strength of Platts’s internal controls,” Dan Tanz, the company’s vice president of editorial, said yesterday in an e-mailed statement from London. Platts has a long track record of “strong internal governance,” he said.

Constrained Regulators

London-based BP spokesman David Nicholas declined to comment on BP crude trades. Shell spokeswoman Julia Dudley also declined to comment. Morten Eek, a spokesman for Statoil, said the company doesn’t comment on specific trades.

Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy markets news and information.

Almunia’s probe sidesteps the legal limits that have constrained commodities regulators, and instead focuses on potential antitrust violations, one of the most powerful enforcement weapons in the European regulator’s arsenal. He’s employed the same tactic in the investigations into credit derivatives and Libor.

‘Creative, Encouraging’

“It’s not only creative, it’s encouraging,” Bart Chilton, commissioner with the U.S. Commodity Futures Trading Commission, said in an interview May 20. “Ultimately these prices that are being posted impact consumers around the world. It’s a big hairy deal.”

Platts’s Dated Brent crude assessment is based on the price of trades, bids and offers on four grades of North Sea crude and related contracts. Platts gathers information from traders through emails, phone calls, instant messages and Platts electronic system, called the eWindow. Then the company calculates the day’s price as of 4:30 p.m. London time.

That benchmark price affects the value of over-the-counter oil derivatives, Brent futures traded on the ICE Futures Europe Exchange in London, and cargoes of crude from Canada to Australia. On May 9, the day Statoil sold the tanker of Norwegian Oseberg to BP, Dated Brent declined $1.83 a barrel to $103.69, erasing $1.1 million from the value of a standard 600,000 barrel shipment.

Worldwide Impact

That loss would be amplified worldwide. About 200 billion barrels of oil and related contracts are priced using Brent each year, Liz Bossley, chief executive officer of London-based Consilience Energy Advisory Group Ltd., and author of “Trading Crude Oil: The Consilience Guide,” said by phone yesterday. That’s $20.6 trillion a year based on yesterday’s settlement price of $103.02 a barrel.

Total Oil Trading, an arm of the French oil company Total SA (TOT), said in an August letter to IOSCO that Platts prices are used to determine the value of as much as 95 percent of crude transactions linked to price reporting, 90 percent of refined products and 90 percent of derivatives in the over-the-counter market. The prices are “out of line with our experience of the day” several times a year, the company said.

“In commodity markets, if you look at the role of Platts, it’s enormous,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies in Brussels, said by phone last week. “In Europe, nobody is looking at this because we have no specific derivatives market regulators or commodity market regulators.”

Loosened Control

Benchmark energy assessments like those published by Platts helped break the pricing control held by oil producers before exchanges offered publicly traded futures contracts. Argus and ICIS also gather information from buyers and sellers about the day’s transactions and publish price assessments for subscribers.

Platts publishes thousands of daily assessments across multiple commodities, which are used to price gasoline, diesel, biofuels, natural gas, electricity and petrochemicals.

“Platts believes the transparency we have brought to oil markets over the last 20 years and the valuable and timely insights into global oil trading activity that we have been able to provide as a result has been of significant benefit to all involved and the public,” Dave Ernsberger, Platts global director of oil, said in an e-mail this week.

Monti’s Crusade

The company’s London offices were searched on May 14 by investigators dispatched by Almunia, a Spanish socialist who is one of the most powerful antitrust enforcers in Europe. The competition office, once led by former Italian Prime Minister Mario Monti, has in the past decade pursued allegations against companies including Microsoft Corp., (MSFT) the world’s largest software maker, and Google Inc., (GOOG) operator of the world’s largest Internet search engine.

Almunia has made policing financial benchmarks a priority. He has opened investigations into Goldman Sachs Group Inc., JPMorgan Chase & Co. and other investment banks over Libor, and he’s examining possible collusion among banks and brokers to manipulate benchmark lending rates in Swiss francs, the yen and the euro.

The EU has treated collusion on benchmark lending rates as a price-fixing cartel that can be punished under its antitrust rules. Fines can be as much as 10 percent of a company’s yearly global revenue and are based on its annual sales in the market where it tried to fix prices.

Limited Jurisdiction

Almunia has stepped in where commodities regulators can’t. The CFTC has limited jurisdiction over the physical trades that underlie the benchmarks. Those transactions are deemed forwards, or bilateral deals that provide for physical delivery between commercial parties, such as an oil producer and refiner, and are exempt from regulation.

“We have no view or surveillance into what they do,” Chilton said. “We’ve tried. We’ve been rebuffed in court. So there definitely needs to be more transparency.”

That’s why Almunia’s inquiry is so important, he said. Chilton declined to comment on whether the CFTC was cooperating with the European Commission inquiry or pursuing its own investigation into price reporting.

The suspected violations are related to Platts price assessments for crude, refined products and biofuels, and may have been going on since 2002, Statoil said in a May 14 statement.

Finnish Refiner

In addition to BP, Shell, Statoil and Platts, EU investigators last week raided fuel trader Argos Energies, the company said May 17. Traders including Glencore Xstrata (GLEN), Vitol and Gunvor were asked to give information, though they aren’t being investigated, according to three people familiar with the situation, who asked not to be identified because the matter is private.

Neste Oil Oyj (NES1V), Finland’s only refiner, said May 16 that it was asked to provide information regarding potential manipulation of global crude and biofuel markets.

As investigators plow through 11 years of instant messages, phone records and emails, the inquiry will probably entangle more participants in Platts energy pricing, a list that includes dozens of banks, hedge funds, oil companies and trading houses, Pirrong said.

“It has a lot of people nervous,” he said.

To contact the reporters on this story: Asjylyn Loder in New York at aloder@bloomberg.net; Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; Rupert Rowling in London at rrowling@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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