ÌìÃÀÍøÕ¾´«Ã½´«Ã½

Some of the biggest names in oil trading are becoming embroiled in a complex web of disputes that could be worth many billions of dollars, as the industry wrangles over who should be liable for contracted shipments that weren’t delivered as a result of the Iran war.

The increasingly widespread issues are adding to headaches for producers and traders already grappling with the biggest oil supply shock in history, and threaten to haunt key Middle Eastern energy markets long after shipping through the Strait of Hormuz resumes, industry executives said.

In one example, a unit of PetroChina Co. has clashed with Shell Plc over a cargo of Emirati crude that was due to load in March, according to people familiar with the matter. TotalEnergies SE is also in dispute with Shell over several other Middle Eastern energy trades, separate people said, asking not to be identified discussing confidential information. The conflicts have also drawn in an exchange where one of the region’s main oil price benchmarks is set.

One senior executive at a trading house said that the scale of disputes and uncertainties surrounding cargoes from the Middle East was so large that — taken all together — it could impact his company’s profits by $500 million in either direction, depending on how they are each resolved.

In some instances the disputes have arisen because producers cut their production levels. In others, buyers with contracts under which they are responsible for lifting oil from ports in the Middle East have said they were unable to secure ships to load it due to the near-total closure of the Strait of Hormuz — leading sellers to terminate the contracts, and in some instances seek damages.

Complicating the situation is the fact that cargoes of oil are typically bought and sold many times before any oil is actually loaded onto a tanker, creating a web of interconnected exposures. The cargoes trade in lively bilateral over-the-counter markets, as well as underpinning billions of dollars of derivatives.

Several of the people said that the proliferation of disputes over contracts that generally refer to English law meant it had become hard to find major law firms in London to take on new cases, as many of them were already representing another party in the conflict.

“At some point a settlement will come and the crisis will probably be over. We expect a lot of claims, a lot of contractual disputes, a lot of force majeure interpretation, a lot of legal battles around that,” Guillaume Vermersch, chief financial officer at Mercuria Energy Group Ltd., said at the FT Commodities Global Summit last week. His comment was echoed by his counterparts at Vitol Group and Trafigura Group.

The dispute involving Shell and the PetroChina unit centers on the market for the United Arab Emirates’ flagship Murban crude, which is traded both via futures on the ICE Futures Abu Dhabi (IFAD) exchange and in OTC markets. In mid-March, Abu Dhabi National Oil Co. told its equity partners in the onshore concession that produces Murban crude that they would be able to lift just 80% of their remaining volumes for the remainder of the month.

While much of the region’s oil flows have been choked off by the war, the UAE has continued to supply oil via a pipeline to Fujairah, which bypasses the Strait of Hormuz.

Disputed Cargo

The dispute relates to a 500,000 barrel cargo of Murban that was due to be delivered via the IFAD contract. The cargo was bought and sold numerous times by companies including Shell, CNOOC Ltd., Total, Mercuria and PetroChina, according to people familiar with the matter. Ultimately, it was due to be delivered by PetroChina to Shell as settlement for contracts on the IFAD exchange.

However, instead of the 500,000 barrels that is standard on the exchange, the cargo — which was due to load onto a tanker on March 21 — was declared to contain only 62,000 barrels, the people said.

Shell is now demanding that the PetroChina unit pay around $35 million in compensation for failing to deliver the full volume of the cargo, and has reported the issue to IFAD, which is investigating, some of the people said.

However, Shell itself was a seller of the same, reduced-volume cargo on the over-the-counter market at an earlier stage of the chain of buyers, the people said. PetroChina is arguing that Shell therefore bears responsibility for the delivery failure it is complaining about.

Shell has stated that the reduction in volume was imposed on it by its own supplier but has not provided further detail or evidence of this, some of the people said.

Any resolution is likely to depend on the different legal statuses of exchange-traded Murban contracts, which are cleared through a unit of InterContinental Exchange Inc., and OTC contracts, which are generally uncleared and reliant on the specific contractual terms between the two parties.

The separate disputes between Total and Shell involve a number of different grades of Middle Eastern oil, including Murban, the people familiar with them said.

Shell, Total and ICE declined to comment. Mercuria, PetroChina and CNOOC didn’t reply to requests for comment.

Launched in 2021, the Murban contract is a key part of the Middle Eastern oil market. Alongside the older Oman and Dubai benchmarks, it underpins the price of the region’s oil exports as well as derivatives markets that until the war had been growing steadily.

Still, the disputes could deal a blow to confidence in the markets. Since the war began, open interest and trading volumes in Murban futures have plunged to the lowest in four years.

Top photograph: The crude oil tanker ‘Devon’ sails through the Persian Gulf towards Kharg Island to transport crude oil to export markets in the Persian Gulf, Iran, on Friday, March 23, 2018. Photo credit: Ali Mohammadi/Bloomberg

Topics Tech Energy Oil Gas