The murky world of oil dealers, fixers and skimmers

One is sued by more than one country’s justice department for alleged toxic waste dunping, another for alleged carousel banking. Almost all of them have been involved in loopholes to circumvent international embargos. Yet, they remain crucial in maximising productivity, investment and sales income for the world’s leading oil producing countries. A glimpse into the shadow realm of no more than a few dozen people who control the multi-billion daily routine of the upstream business can cause a true shock.

by Charles van der Leeuw, KZW senior contributor

The murky world of oil dealers, fixers and skimmersFrom time to time, a glimpse of Kazakhstan’s oil exportations methods and proceedings pops up – especially if package deals in the form of open offers are being auctioned. All of a sudden, names like Vitol, Glencore and Trafigura appear in the media without much detail. This stands in sharp contrast to operators in the country such as high-profile Chevron, Eni, Royal Dutch Shell and state-controlled Kazmunaygaz. Yet, the traders, through whose hands the bulk of Kazakhstan’s oil output of 1.4 million barrels a day is being sold, hardly make less money on the oil trade than oil companies proper. That there is a reason for oil trade’s hide-and-seek methods was recently illustrated by an occasion on which Trafigura appeared in the headlines in quite a different context.

Last week, Trafigura paid out the unimpressive sum of 33 million euro to thousands of victims, 15 of whom died and hundreds remain lethally ill, as a result of toxic waste dumping in Ivory Coast back in 2006. The waste had been dumped by local operators who had been paid in the order of 10 million euro to do the job in such a way that Trafigura remained aloof from eventual judicial consequences. Also last week, a UK court of law ruled that the settlement with the victims cleared Trafigura from prosecution in Britain on the issue. However. Greenpeace appealed against the Prosecution in The Netherlands, Trafigura’s holding company’s home base, insisting that responsibility for crimes than include man slaughter cannot be bought off under any European legislation.

Illegal waste dumping is the third-largest criminal sector in the world in terms of estimated revenue, after arms smuggling and drugs smuggling. It is also a relative newcomer in crime, since its arrival on the scene dates from the 1970s, as governments and international organisms started to ban waste dumping at random. Following that, the industrial establishment in the west could no longer simply dump all their waste in their backyard. As a result, dumping grounds were displaced from one’s own backyard to one’s neighbours’ backyards. It was thus that the first wave of waste-smuggling consisting by and large of mavericks hiring ships and other means of transportation to export hazardous waste appeared on the scene.

This was followed by international measures to encourage governments of cash-strapped countries, most of which emerged from the disintegration of the traditional European colonial empires, to stop accepting toxic waste from their former colonial masters’ countries in exchange for the cash they needed to keep populations fed. The most important treaty in this context was the Basel agreement, built up in the 1980s and expanded in the 1990s, to which an overwhelming majority of both developed and developing countries (with the notable exception of the USA) has now signed up. Violation of restrictions on trade and transportation of wastes considered dangerous to public health to crucial levels puts the guilt on both sides of the line.

The Basel agreement forbids both import and export of a long list, regularly updated, of toxic and other hazardous agents and substances. This in turn has led to waste-smuggling proper, initially carried out by the same mavericks that used to deal in dumping solutions but later taken over by criminal organisations not less well structured than their peers on the illegal weapons and narcotics markets in the world. The main difference is that most of the “waste mafia” operates not by plane but by ship. There are international treaties against dumping at sea, but they are not half as effective as the Basle treaty’s implementation within national borders and rules against transportation are even more half-hearted.

So where does Trafigura fit in here? The fact that its name appears in the context of waste transportation and dumping appears rather odd. Even though oil trade companies are not half as clearly in the limelight as oil companies proper, the name of Trafigura and those of its two largest peers in the world, Vitol and Glencore, form at least to some extent part of the public domain and though trade conditions remain often obscure, it is no secret how it takes place on a routine basis. Had it preferred to operate behind the veils of opaque mailbox firms through networks with their main antennas in places such as Gibraltar, the British and Dutch Antilles and Pacific business havens, Trafigura’s role in the ongoing scandals would have been a lot more difficult to determine.

Trafigura was founded back in 1993 by three high-level figureheads within nowadays rival Glencore by the names of Claude Dauphin, Graham Sharp and Eric de Turkheim. The three are still in control of the company, and all of them have their homes in the agglomeration of London. They have friends and associates in high places, including the UK’s former minister Peter Fraser and the Tory fraction leader in the British Upper House, Lord Strathclyde. The latter, who acts as non-executive director on the board of Galena Asset Management, Trafigura’s investment and hedge tool, recently announced his intention to withdraw – according to The Guardian both in connection with the toxic waste affair and the upcoming elections in Britain.

As for Glencore, its history goes back to a figurehead whose fame remains both dark and colourful up to this day. His name is Marc Rich, the son of a Jewish refugee from Germany born in Belgium in the run-up of the Second World War whose name was Reich. After the German invasion of Belgium in 1939, the family fled to neutral Spain, where Marc, who only later “Anglified” his name, grew up. Rich started his adult life as a fortune seeker in Europe and the Americas and eventually found it in commodity trading. After some years of haphazard incidental wheeling and dealing, he established his Switzerland-based company RichCo as of 1974. In 1994, a management buy-out from Marc Rich was finalised and the name was changed into Glencore. In the process, Trafigura also emerged through a management and owner split-off.

It is Marc Rich, later involved in a range of financial scandals and judicial investigations, who has stood at the cradle of a global skimming scheme which from the shadows dominates commodity markets all over the world. The overall aim is to shield both buyers and sellers of commodities against respective and mutual libels, in particular in those cases – as in the oil industry – where the buyers and sellers are by and large the same. To put it simply, the method works as follows – taking oil as an example. Company X produces half a million barrels a day in country A and needs to sell it to company Z operating in country C.

Selling it directly would not only violate various anti-monopoly regulations but it would also expose both upstream and midstream operators (in many cases, they are one and the same, namely the oil multinationals) to accumulative tax claims. This is where the Y-factor steps in, based in country B. Whereas X and Z are in the limelight and operating in oil producing and oil consuming countries (A and C), location B is a place such as Switzerland, Gibraltar or one of the world’s other notorious tax paradises. They pay the best possible price to the upstream seller and sell it with the highest possible profit to midstream buyers.

On both ends of the line, tax profits amount to percentages topping 20 per cent of the sales and purchasing prices – thereby explaining the multi-billion profits traders are making each year. Moreover, they thus avoid price fluctuation risks in the process since company Y is hedging their merchandise in futures and other paper for them. In all, a formidable kickback which within single tax zones would be hard to pertain, whereas in crossborder trade, especially with non-controlled oceanic buffers between them, it seems to have been perfectly legal so far.

But this is not the only advantage. In this way, embargoes like the one at the time against South Africa, and later against Iraq and Iran, can be easily circumvented by oil companies. Even if exposed, they can always hide behind their skimmers. Other libels, e.g. regarding accidents during transportation causing up to hundreds of millions in environmental damage, can also be transferred to the trader who acts as the temporary owner of the merchandise. This is what could explain the latest Trafigura affair and the generosity with which they could afford to put their payoff on the table. Skimming pays enough to assume such risks.

Statistics, though little detailed and only in part available (see table) show that the revenues of the world’s oil skimmers’ big three are in the order of 300 billion US dollar over 2008, thereby suggesting that the entire “Y” sector is likely to make up for up to a trillion dollar per annum. Though well over a quarter century old, the sector’s earnings have been booming into the new millennium. This, Glencore watched its revenue shooting up from 61 billion dollar in 2004 to close to $200 billion last year, with oil trade as the largest subsector accounting for one-third of the total amount. Though profits declared remain blow 10 per cent of revenue and look rather bleak in comparison to those of leading global oil operators, they still remain impressive and the observation that profits seem to have suffered a lot less from last fall’s decline in oil prices may raise some eyebrows.


company Vitol Glencore Trafigura
oil trade volume 4.1mb/d n.a. 1.5mb/d
number of employees n.a. 2000 1900
revenue S191.2bn $152.2bn $73.0bn
profit n.a. $4.75bn $440m

sources: companies’ data, news reports