* Vitol buys Iranian fuel oil, offers to China
* Uses ship-to-ship transfer off Malaysia
* Vitol says bought an Iranian fuel oil cargo in July
* Swiss-based trader not obliged to follow EU sanctions
(Adds comment in paras 3-4, 10, 11-12)
SINGAPORE/BEIJING - Vitol, the world's largest oil trader,
is buying and selling Iranian fuel oil, undermining Western
efforts to choke the flow of petrodollars to Tehran and put
pressure on Iran's suspected nuclear weapons programme.
Vitol last month bought 2 million barrels of fuel oil, used
for power generation, from Iran and offered it to Chinese
traders, Reuters established in interviews with 10 oil trading,
industry and shipping sources in Southeast Asia, China and the
Middle East.
A spokesman for Vitol declined to comment before publication
of this story. The firm subsequently issued a statement saying
Vitol Group is in compliance with all international laws on
trade with Iran.
"A Bahraini subsidiary company purchased a spot cargo of
fuel oil from a non Iranian counterparty in July 2012. The fuel
oil delivered under contract was of Iranian origin. Vitol Group
companies no longer purchase any product of Iranian origin,"
Vitol said, without elaborating.
Swiss-based Vitol is not obliged to comply with a ban
imposed in July by the European Union on trading oil with Iran
because Switzerland decided not to match EU and U.S. sanctions
against Tehran.
The company earlier in the year stopped trading Iranian
crude oil from its main European offices before the July 1 EU
embargo deadline. But the trading sources said it has continued
to deal in Iranian fuel oil from the Middle East.
The tale of the cargo of Iranian fuel oil involves tanker
tracking systems being switched off, two ship-to-ship transfers,
and blending of the oil with fuel from another source to alter
the cargo's physical specification.
Privately-held Vitol SA is led by its long-time CEO Ian
Taylor, a Briton. Taylor was among leading donors to Britain's
ruling Conservative Party named in March by the Prime Minister's
office as having dined with David Cameron at his private
apartment in Downing Street amid the fall-out from a "cash for
access" party funding scandal. Britain is a vociferous critic of
Tehran's nuclear programme and a leading advocate of the EU
sanctions.
SWISS LOOPHOLE
Vitol has said previously it is in compliance with sanctions
against Iran, but has declined to say whether or not it would
follow the strict EU regulations rather than Switzerland's.
A spokeswoman for Switzerland's federal department
responsible for sanctions, SECO, said Vitol's Swiss branch had
confirmed that it was not involved in the purchase of Iranian
fuel oil in July. She added that EU and Swiss law did not apply
to Vitol's trading branch in Bahrain. She declined to say if
Vitol was on a list of companies that had sought permission to
trade Iranian oil, citing commercial secrecy.
Swiss NGO The Berne Declaration said the onus was on Swiss
authorities to tighten regulation. "These companies just don't
learn. Because of that, Swiss policy makers need to learn very
quickly," said spokesman Oliver Classen.
Rival Swiss-based traders Glencore and Trafigura
said in July they had halted all Iranian oil trade,
even though the Swiss government opted against following
measures imposed by Washington and Brussels.
The measures have halved OPEC member Iran's crude oil export
revenues, devaluing the rial currency and bringing financial
hardship to millions of Iranians.
On top of the EU ban, Iran's four biggest oil buyers -
China, India, Japan and South Korea - have reduced their imports
by at least a fifth to secure exemptions from the threat of U.S.
financial sanctions on their companies.
Vitol last year earned record revenue of $297 billion, a
near-five-fold increase since 2004. It does not reveal profits.
Fuel oil is a small part of its trading portfolio,
accounting for $24 billion of revenue last year compared to $105
billion from crude and $100 billion from other refined products.
Profit margins on oil trade are typically very low, but
traders said Iran's difficulties in finding buyers because of
sanctions are likely to have made for a fat profit margin for
trading its fuel oil.
SHIP-TO-SHIP
Vitol acquired the Iranian fuel oil early this month in a
ship-to-ship transfer off Malaysia from a National Iranian
Tanker Company (NITC) vessel, the Leadership, onto a
Vitol-chartered tanker, the Ticen Ocean.
The Ticen Ocean was sub-contracted by Vitol for floating
storage off the Malaysian port of Tanjung Pelepas from Titan
Petrochemicals, a Hong Kong company which itself hired
it from shipowner Frontline of Norway.
Frontline said Titan had told it the ship was not used to
store Iranian oil. "Our only counterpart in this matter is Titan
and they have said it is not correct that there has been Iranian
oil on the boat," said Frontline CEO Jens Martin Jensen.
Titan did not return calls or emails seeking comment.
The Leadership left Iran's main oil export terminal at Kharg
Island during the week of Aug. 23, passing through the Strait of
Malacca before disappearing from freight tracking systems off
the Malaysian coast on Sept. 4. Since sanctions were imposed,
Iranian vessels have frequently switched off the onboard
'black-box' transponders used in the shipping industry to
monitor vessel movements.
Industry sources in Tanjung Pelepas who monitor shipping
transfer operations in Malaysian waters said Vitol later brought
alongside another tanker, the Speranza, to replace the Ticen
Ocean as floating storage. The Speranza, owned by China's Sino
Shipping Holdings, arrived at Tanjung Pelepas on Sept.
13-14, Reuters data shows.
Vitol also transferred some of its fuel oil from the Ticen
Ocean between Sept. 11-12 to another vessel, the Kamari I,
according to Reuters data. That cargo was delivered to Vitol's
storage terminal on the Malaysian island of Tanjung Bin, inside
Tanjung Pelepas port, one trading source said.
'SPECIAL BLEND'
Traders said the company then blended the oil in storage
with fuel oil sourced from Europe, calling it a "special blend"
and offered it to Chinese traders. Reuters was given a copy of
the specifications of the cargo on offer.
Vitol first asked a $30 premium to Singapore's benchmark
180-centistoke fuel oil price, said a Chinese industry executive
who manages some of China's many small, independent refineries,
known as teapots. That would have valued the 2-million-barrel
cargo at about $250 million.
"Because the offer was too high, our people didn't really
carry on the talks," the Chinese executive said. "Vitol also
appeared not in a hurry to sell, so was not being aggressive."
Two Asian refinery buyers who were then offered the oil said
the asking price was cut to a $12-$14 premium to Singapore
benchmark prices, or around $175 million in total.
"Vitol is offering the cargo as a special blend to teapot
refiners in Shandong," said a China-based trader. "No one's
agreed to buy the Vitol cargo. I declined because I wasn't sure
of the quality and specifications."
At the time of publication it is not known whether Vitol had
agreed a deal to sell the oil.
INSURANCE
Vitol's use of the Ticen Ocean to store Iranian oil could
put the tanker's insurance at risk. The vessel is insured by the
North of England P&I Association.
The EU's oil embargo bans EU insurers who underwrite around
90 percent of the world's tanker fleet from providing cover for
ships carrying Iranian oil.
Mike Salthouse, director of North Insurance Management,
which acts as manager for the North of England P&I Association,
said it would not provide cover for tankers storing or
transporting Iranian oil.
"We would not expect to continue to insure any fleet
actively engaged in this trade," he said, but declined comment
specifically on the Ticen Ocean.
(Additional reporting by Manash Goswami in SINGAPORE and Emma
Farge in GENEVA; Editing by Ian Geoghegan, Richard Mably, Janet
McBride)