EMEA News
Appetite for Risky Oil Deals is Increasing, Summit Hears
Risky lending deals to producers and refiners driven by rising levels of distress are on the increase, despite many trading houses reportedly being owed hundreds of millions of dollars from failed deals.
Trading house executives speaking at the Reuters Commodities Summit last week said that as the two year price rout intensifies, more and more risky pre-financing deals are being made.
Mohamed Bassatne, chief executive for BB Energy, remarked, "That's maybe the sweet spot for us, where we are willing to take the risk, get a foothold and develop that business."
Bassatne's comment is noteworthy considering BB Energy reportedly invested about $120 million in the Samir refinery in Morocco, only to have production at the facility be suspended last year.
The Samir debacle cost several trading firms and oil majors close to an estimated $1 billion, and the summit heard of similar arrangements coming under stress in Nigeria in 2016.
Pre-financing is inherently risky because more traditional financing for those seeking money is unavailable to them; however, should such a deal be successful, it means companies can get exclusive access to crude or oil products to trade on international markets.
With interest rates at record lows, banks and other organizations with capital want investments that could bring a better return, and Torbjorn Tornqvist, chief executive for Gunvor, told summit delegates, "Generally we are living in a world where capital is less of a problem than it has ever been."
"We have seen defaults before and we will see more in the future," said Alex Beard, head of oil at Glencore.
"That (pre-financing) has been a core part of the business, it's been a good part of the business."
Financing issues of another kind are very much on the mind of policy makers in Iran, which reportedly is trying to ease its dependence on China as its dominant investment partner, only to be stymied by resistance as well as residual international sanctions.
Bloomberg notes that disenchantment with western investors reluctant to invest in the Islamic republic is growing, and that China, knowing it doesn't have a great deal of options, wants to extend its relationship further by rebuilding its ancient Silk Road trade routes to Europe.
Iran's ongoing difficulty in attracting investment is also the subject of a Reuters report showing that nine months after the sanctions were lifted, some of the world's biggest traders – including Vitol, Glencore, Trafigura, and Gunvor – have not yet struck any major deals with the country.
Ian Taylor, chief executive of Vitol, told the Reuters Commodities Summit that the lack of a usable dollar system to conduct transactions with the country makes U.S. currency transfers troublesome and hinders trading.
Earlier this year, despite Iran's meteroric comeback on the international market, Mike Wittner, head of oil-market research at Societe Generale SA, declared, "By the end of this year, Iran will be maxed out."
