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Time to welcome Trafigura into CSR fold

May 2012

Oil trader Trafigura has been held up as displaying the worst of corporate irresponsibility. Oil might be a dirty business, but it is lazy to write such companies off as mere heartless scavengers, argues Patrick Heren

In the late 1970s a director of Royal Dutch/Shell invited me and the editor of the oil market newsletter on which I was a junior reporter to lunch at Wheeler’s in Soho, central London, chosen perhaps because of presumed bohemian associations with the press. My editor, Jan Nasmyth, wrote a weekly comment which was read by everyone from oil traders to the directors of major oil companies, and the man from Shell wanted to plant an idea in Jan’s fertile mind.

The proposition was simple in theory, if hard to put into practice. It was that the oil majors, giant listed companies with enormous reputational exposure, were no longer prepared to risk chartering substandard tankers which were likely to damage the environment. To this end he hoped that concerted action might produce a greenlist of well managed vessels. Such tankers would command a premium in the charter market: perhaps a formal two-tier system would emerge.

It was not clear how this state of affairs would be brought about, but the Shell director hoped that if Jan wrote about it, more general discussion might be the result. Even in those days, companies had to be careful about collusion, and newsletters could provide a useful neutral forum.

The point of this ancient anecdote is that Shell was acting in what it believed was a socially responsible way that also benefited its business and its shareholders. The historical context is vital. During the years of post-war growth, the industrialised world had become increasingly dependent on oil imported by sea from the Middle East and elsewhere. Global production soared from 10 million barrels a day in 1945 to 58 million by the time of the first oil crisis in 1973. By way of contrast, over the next 37 years oil output rose by a modest 41%.

This massive growth meant a hell-for-leather expansion in the number and size of tankers. In the 50s and 60s, the major oil companies owned and operated large fleets of their own. But many others also invested in tankers, notably the Greek families who still feature largely in global merchant shipping. There was also the offshoring phenomenon, with owners shifting the registration of their fleets to flags of convenience – low tax and crewing costs – such as Panama and Liberia.

The rush to expand fleets came to a juddering halt with the first oil crisis of 1973/4. For years afterwards there was surplus capacity, and intense competition which drove down charter rates. The oil majors reduced or eliminated their own fleets in order to take advantage of the abundance of cheap third party shipping. The trouble was that they had less control over the operation of these vessels. A series of disasters followed: Torrey Canyon (Scilly Isles 1967), Argo Merchant (Nantucket 1976), Amoco Cadiz (Brittany 1978) and Atlantic Empress (Trinidad 1979) were just four of the most egregious.

Although no one in the oil industry expects to be trusted, let alone loved by the public, it is fair to say that the leaders of most companies aim to operate safely as well as profitably. The Shell director was speaking as an executive responsible for the reputation of a complicated multinational with many moving parts which it is almost impossible to fully co-ordinate, let alone control. His company, like all integrated oil companies, makes the vast majority of its profits exploring for and producing oil. Transporting it once produced is a necessary function, which, he reasoned, should be executed as cleanly and efficiently as possible – and seen to be so.

Around the time of our Soho lunch, safety was becoming a major concern within the oil industry. Although recent events in the Gulf of Mexico may suggest to outsiders that this is not the case, the degree to which the western oil industry had cleaned up its act was illustrated when the Russian oil industry began to open up in the early 1990s: international oil executives were appalled by the extraordinary filth, waste and environmental degradation of the massive Soviet oil installations. None of them could imagine allowing such things to happen on their watch. Which brings us to the present, and the scandal that has surrounded the oil trader Trafigura, and the apparent dumping in the Ivory Coast of poisonous waste from a tanker it had previously chartered.

Trafigura is the world’s third largest independent oil trader. It is not an integrated oil company like Shell or BP, nor is it publicly quoted. Oil traders exist in the interstices between the major oil exporters and the big integrated companies.

The Mexican state oil company Pemex had accumulated 84,000 tonnes of coker gasoline as a result of not investing in desulphurisation and other equipment in a refinery that was processing a heavy and noxious blend of crude oil. Coker gasoline needs to be extensively treated to make it commercial.

Pemex needed to clear its tanks, and would sell the product at a substantial discount from the standard gasoline price. Trafigura was prepared to take it on, because, as the documents later published in the Guardian show, its traders calculated that they could turn £7m profit on each of three cargoes. Although a relatively small deal by Trafigura standards – the company moves about 3% of world oil production – this was a much higher margin than its overall business, which like most commodity trading is a matter of narrow calculation.

There being no onshore facility willing to process the raw material, the cargoes were ‘washed’ on board ship with caustic soda. From the outset, Trafigura understood the problem they would eventually have to deal with – traders routinely referred to the Mexican product as ‘crap’ or ‘shit’.

Trafigura was not trying to operate a tanker-chartering policy of the high-minded sort proposed by Shell back in the seventies. Trafigura was looking for what its traders called a ‘dog’. In the email traffic obtained by the Guardian, there are some grimly humorous exchanges, especially when a trader wonders if it would be possible to charter an aging ‘dog’ at the end of its working life for $5,000 a day. Not unless you are avoiding paying insurance and you don’t care if she sinks, responds a colleague. The dog that was eventually chosen was the Probo Koala, which was used both to wash and transport the material purchased from Pemex. The final destination for the treated low grade gasoline was Nigeria.

But then a solution needed to be found for cleaning the tanker which contained 500 tonnes of residue. For weeks Trafigura’s traders and shipping specialists bounced ideas around about who might deal with the slops – and it is clear that the CEO Claude Dauphin was aware of the problem. They knew that they could not just dump it. But they rejected one clear solution, in Amsterdam, when the processing price went up because the slops were more noxious than anticipated.

Instead, following the final cargo discharge in Nigeria, the slops were taken off the Probo Koala by an obscure third party Ivorian contractor who illegally dumped them in rubbish tips around Abidjan, causing widespread sickness and, allegedly, 16 deaths.

Trafigura has always denied legal responsibility for this appalling pollution, although from an early stage it seems to have tacitly accepted a measure of moral responsibility. Why otherwise would Dauphin have gone to Abidjan in the aftermath? He and four colleagues were arrested and remained in jail for five months. Trafigura subsequently paid the Ivorian government £100m purportedly to help with the clean-up, no doubt also easing Dauphin’s path to freedom. Later it settled a class action taken out on behalf of 31,000 Ivorian citizens for £30m, but without admitting liability.

The company later won an apology and £25,000 payout from the BBC after the corporation admitted libelling the group. The BBC stated in court that “the evidence does not establish that Trafigura’s slops caused any deaths, miscarriages or serious or long-term injuries” to residents of West Africa.

So what is the moral of this sorry tale? Trafigura is one of a handful of large independent oil traders that play a vital if unscripted role in moving oil around the world. They are motivated by profit, but ultimately it is not in their interest to act illegally or immorally. The Probo Koala affair has so far cost Trafigura a headline £130m and much more in legal and PR fees. It is clear also that Trafigura’s management cares about its image to a degree that some may find surprising. No doubt more junior staff need to believe they are not part of an evil empire.

From a CSR perspective, Trafigura needs to be brought into the circle of firelight. Reading the righteous indignation of the journalists at the Guardian and elsewhere, it is too easy to dismiss Trafigura and other oil traders as merely heartless scavengers. But the disaster in Abidjan must have taught Trafigura, if it didn’t previously know, that it operates in a world where actions and inaction have consequences. And that surely is where social responsibility begins.

Patrick Heren has been an energy markets journalist since 1976. He is the originator of the Heren Index, which is the price benchmark for wholesale gas, electricity and carbon in Europe. The views expressed here are his own.




Trafigura | Global | Business ethics

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