European authorities raid Shell, BP and Statoil offices to probe suspected manipulation of oil prices

Published: Wednesday May 15, 2013 MYT 9:27:00 AM

European authorities raid Shell, BP and Statoil offices to probe suspected manipulation of oil prices

LONDON/OSLO: European authorities have raided offices of oil majors Shell, BP and Statoil in an investigation of suspected manipulation of oil prices, one of the biggest cross-border actions since the Libor rigging scandal. Authorities have sharpened scrutiny of financial benchmarks around the world since slapping large fines on some of the world’s biggest banks for rigging interest rate benchmarks. On Tuesday, the European Commission said it was investigating major oil companies over suspected anti-competitive agreements related to submission of prices to leading oil pricing agency Platts, a unit ofMcGraw Hill Group. “Officials carried out unannounced inspections at the premises of several companies active in and providing services to the crude oil, refined oil products and biofuels sectors,” the Commission said. The inspections took place in two EU member states and one non-EU country, it said. “The Commission has concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products,” it said.

The Commission also said companies may have prevented others from participating in the price assessment process, with a view to distorting published prices.

Statoil said the suspected violations were related to the Platts price assessment process and may have been ongoing since 2002.

The probe will shine a light on the methodology designed by Platts for daily assessments on the physical oil markets, used to close deals worth billions of dollars.

The so-called Platts window, or market-on-close (MOC) system, is a daily half-hour period in which it determines cash prices through a series of bids, offers and trades.

Critics say the system is only a snapshot of the market, because it excludes trade outside the window – one reason that it can be vulnerable to manipulation.

“I remember looking at these sorts of issues 10 years ago, and nothing has changed, it’s sort of an accident waiting to happen,” said Craig Pirrong, Professor of Finance at the University of Houston, noting that after the Libor scandal, price assessment agencies were under “incredible scrutiny.”

“Regulators and law enforcement officials are quite upset with this sort of alleged conduct and they have proven that they are willing to go after companies that misreport for very large sums of money,” Pirrong said.

“Potentially the exposure is quite large.”

PRICE DISTORTIONS

The Commission said that even small distortions of assessed prices may have a huge impact on the prices of crude oil, refined oil products and biofuels purchases and sales, potentially harming final consumers.

It added the fact inspections had been carried out did not mean the companies were guilty of anti-competitive behaviour.

The Commission did not make clear whether it was investigating a specific incident. These investigations typically take years to draw final conclusions.

Platts, Royal Dutch Shell, BP and Statoil said they were cooperating with the probe.

French major Total said there had been no inspections at its offices. The Commission did not list the companies being investigated, and it was not clear whether other companies were included.

Statoil said authorities had inspected its office in Stavanger on the request of the European Commission on suspicions of anti-competitive behaviour.

The Norwegian state, the controlling shareholder of Statoil, said the probe was a matter for the company’s management to handle and declined further comment.

Platts said the European Commission had “undertaken a review at its premises in London this morning in relation to the Platts price assessment process”.

The International Organization of Securities Commissions (IOSCO) is running a wider review of benchmarks, and the U.S. Commodity Futures Trading Commission is looking into the setting of gold and silver prices in London.

IOSCO said it was not involved in the oil enquiry. The CFTC declined to comment, and the Federal Trade Commission had no immediate comment.

Thomson Reuters, parent of Reuters news, competes with Platts in providing news and information to the oil market. – Reuters

Shell Targeted With BP, Statoil in European Oil-Price Probe

European antitrust regulators began a probe of potential manipulation of oil prices, expanding into energy markets after banks were investigated for fixing interbank lending rates.

Royal Dutch Shell Plc (RDSA), BP Plc (BP/) and Statoil ASA (STL) said they’re being investigated after the European Commission conducted raids in three countries. Platts, which publishes pricing benchmarks used by the oil industry, said it was also visited by regulators.

The oil-price probe follows findings by U.S. and U.K. regulators that banks manipulated the London interbank offered rate, or Libor, that may have helped them generate profits from derivatives trades. Royal Bank of Scotland Group Plc, UBS AG, and Barclays Plc have been fined around $2.5 billion and other firms remain under investigation.

“It is certainly the case that Libor drew attention to financial benchmarks in general and the question of how these agencies report prices,” Timothy McIver, an antitrust lawyer at the London office of Debevoise & Plimpton LLP, said in an e-mailed statement. “This is obviously the latest in a series of such investigations.”

Statoil said the suspected violations relate to Platts prices.

Distorted Prices

“The commission has concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products,” the executive arm of the EU said in the statement.

Platts said in March it would introduce a quality premium for Ekofisk and Oseberg crudes, two of the four grades that make up the Dated Brent marker used to price more than half the world’s oil. That came after Shell made adjustments to its trading contract for three blends including Brent.

Platts, along with two other reporting agencies, Argus Media Ltd. and ICIS, published a self-regulatory code in April 2012 in response to concerns from the International Organization of Security Commissions that their prices were at risk of manipulation.

Price assessments could be vulnerable to manipulation because traders participate voluntarily, meaning they may selectively submit only trades that benefit their positions, IOSCO said in an October report. Total Oil Trading SA, the arm of the French oil company called Total SA (FP), said in a submission to the forum of global regulators that the published oil price is wrong “several times a year.”

Sets Precedent

“The actual mechanism of price discovery is suspicious to EU regulators even though I believe it works,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said in an e-mailed response to questions. The probe “sets the precedent for similar investigations.”

Inspections were also carried out on the commission’s behalf by the EFTA Surveillance Authority in one European Economic Area member state, the Brussels-based commission said.

“The authorities suspect participation by several companies, including Statoil, in anti-competitive agreements and/or concerted practices,” Statoil said in a statement. “In addition, the inspection relates to potential abuse of possible dominant position by another party.”

Undertook Review

The suspected violations are related to the Platts’ Market-On-Close price assessment process, used to report prices in particular for crude oil, refined oil products and biofuels, and may have been ongoing since 2002, Statoil said. Platts said the Commission undertook a review at its premises in London today and that it’s cooperating.

“It’s a bit like the oil industry version of Libor,” said Iain Reid, an analyst at Jefferies Group LLC in London. “But I’d be very surprised if it comes to anything. I can’t imagine that Shell or Statoil would deliberately be trying to rig the market.”

Oil companies have been the subject of the EU’s antitrust watchdog before. In September 2006, it fined 14 companies 266.7 million euros ($346 million) for fixing the price of bitumen, a petroleum byproduct used to make asphalt, over eight years on the Dutch market. Shell, whose fine was increased for being a repeat offender, received the biggest penalty.

Currently Assisting

Shell, Europe’s biggest oil company, said it’s “currently assisting” the commission in an inquiry into trading activities and that the company is cooperating, without giving further details.

“BP is one of the companies that is subject to an investigation that was announced earlier today by the European Commission,” BP spokesman Robert Wine said in an e-mail. “We are cooperating fully with the investigation and unable to comment further at this time.”

Total SA declined to comment and Eni SpA couldn’t immediately be reached.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net; Lananh Nguyen in London at lnguyen35@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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