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Sat 25 Dec 2010 12:00 AM

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Trading up

Vitol’s UAE storage and refining facility has helped propel Fujairah to the big leagues in the global energy trading game.

Trading up
Christopher Bake, managing director, Vitol Dubai.

Oil trading on a global scale is a complex task when you are
dealing with 5 million barrels of crude oil products every day. Swiss based oil
trading company, Vitol, which has been specialising in the transacting, storing
and transporting of oil for the best part of 50 years operates various fuel storage
terminals around the world as part of its larger remit of providing energy and energy
solutions to customers that are as diverse as electricity companies and airlines.

On the back of a recent announcement for a major oil import and
distribution terminal in Cyprus worth US$129 million, Oil & Gas Middle East
joined Vitol’s Dubai based managing director Christopher Bake on a site visit to
its strategically important Fujairah fuel storage and refining facility to discuss
the site’s growth plans and the importance of crude oil pricing to the oil and gas
industry.

Vitol which owns 90% of the Fujairah Refining Company Ltd (FRCL)
site - through its storage terminal arm Vitol Tank Terminals International (VTTI)
- with the balance 10% owned by the government of Fujairah,
first bought the facility in 2007 after it was mothballed in 2003 and operated as
an oil terminal in the interim period.

With the port of Fujairah literally next door and around 200
ships anchored offshore at any given time, Vitol’s FRCL facility is ideally positioned
to handle crude oil and products coming in and leaving the region. Bake says that
from the outset the
concept was to take over the facility, overhaul and expand it from its initial 460,000
cubic metre storage capacity to 1.2 million cubic metres over the past two years
with further land to
expand upon.

“Fujairah is probably the largest
independent terminal catering to one user in the region,” claims Bake. “Fujairah,
logistically over the last 10-15 years has changed dramatically, it’s the third
largest bunkering port in the world and with the existing terminals and the advent
of some other independents it is going to become  a world scale crude oil and oil product storage
hub,” he explains.

He says that the Fujairah facility will cater to regional supply
allowing the company to run the refinery and add value to products that it can buy
and sell in the region and believes that the growth of Fujairah
as a major logistics and trading hub will spur growth in other related areas.

“You have Fujairah that grows
as a natural port for a staging post to vessels calling into the Gulf, on the back
of that a marine industry grows, on the back of that a large bunkering business
grows. The bunkering business today in Fujairah
makes it the third largest bunkering port in the world.”

As the refinery is currently being expanded, the company has
further plans to increase crude storage.

“Right now we’re running some crude blends, condensates and heavy
crudes and we’re just looking to give ourselves a little bit more flexibility by
putting some incremental refining capacity on line in the next 12 months,” says
Bake.

Pricing & Benchmarks

Bake, who joined Vitol as a gasoline trader in Houston, Texas
in 1994, is adamant that the market pricing mechanisms of crude is often overlooked
particularly in the upstream segment of the industry.

He says that the creation of the Dubai Mercantile Exchange (DME)
in which Vitol has a small regional equity stake, is significant and has allowed
a transparent market driven pricing mechanism that can act as a benchmark for crude
prices. He admits that it has yet to be accepted by influential players such as
Aramco and the Abu Dhabi
based heavyweights.

“It’s ‘chicken and egg’, they understand their pricing references
right now, their customers understand their pricing references and they’re afraid
that if they switch over to this new reference they may lose out,” Bake says.

However because the DME tracks the more established West Texas
Intermediate (WTI) or Brent indices, Bake explains that there is little to be afraid
of as the relative value of crude is dependent on the values of alternative benchmark
prices.

Risks

The managing director said that as Fujairah
becomes a more prominent  port with incremental
storage there will be more interest to store regional products and crudes and manage risk on a regional
basis out of the emirate.

“This is generally a very stable region with fairly predictable
supply models but historically in the last 10-15 years with the recent conflicts
in Iraq and with some of the
tensions with Iran,
there is always a risk.  One such risk is
of a potential bottleneck in the Strait of Hormuz
and the potential curtailment to oil flow,” Bake says.

On a day to day basis, the risks that Vitol must manage are the
physical prices of the oil and products it trades.

“Between 13-15 million barrels of oil flows out of this region
[daily] so the impact geopolitically is fairly immense,”
he says.

“Most of the oil sold
in this region is sold to an end user and that barrel is not freely tradable,” he
says, explaining that regional oil producers tend to have airtight transaction agreements
with end-users, specifically refineries. The Oman Crude Oil Futures Contract (DME
Oman) is the only freely-traded free destination crude barrel that trades in the
Middle East.“Omani barrels as with  other areas such as West African or Caspian producers
can be freely traded i.e. they can be bought and sold to multiple intermediaries
which creates liquidity and transparency and which in the end sets the price of
oil.

“The free purchase and
sale of oil establishes price and it’s the incremental barrel (or not) thereof,
that determines at what price the barrel transacts at,” Bake says.

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