Glencore challenges Vitol in Kazakh oil exports

By Dmitry Zhdannikov and Gleb Gorodyankin

LONDON/MOSCOW, Oct (KOSDAQ: 039200.KQ - news) 11 (Reuters) - Rivals to trading house Vitol led by Glencore are challenging its decade-long leadership in crude exports from Kazakhstan to Europe as new Caspian Sea Kazakh production comes onstream.

The second-largest oil producer in the former Soviet Union after Russia, Kazakhstan's output is set to increase by at least a quarter to over 2 million barrels per day (bpd) in the next decade as output swells from its Tengiz, Karachaganak and Kashagan fields.

The increase has prompted oil majors working in Kazakhstan to look at various export routes from the landlocked country, including to China and to Europe via the private Caspian pipeline CPC (Taiwan OTC: 1597.TWO - news) as well as Russian state pipelines.

The latter route can pump more than 300,000 bpd and for over a decade those volumes have been exported from Russian Baltic Sea ports by Vitol.

Vitol, which produces none of the oil itself, helps to aggregate small parcels from all Kazakh producers into full tanker-size portions. That practice suits small producers as it frees them from extra costs and facilitates their exports. Some larger producer companies, though, would prefer to export crude on their own behalf.

Until now, Vitol's trading house rivals and the large oil firms that operate in the country had failed to get a share of the export business.

Vitol says its success in securing such a long and enduring export operation is based on a compelling business case.

"Vitol is proud of its long history of partnership with the Kazakh oil industry. It is an important business for the company and we look forward to building on these relationships in the years to come," a Vitol spokeswoman said.

"We have committed to the market over the long term and have a compelling commercial offering," she added.

Now the Vitol scheme has been successfully challenged for the first time. The Western consortium KPO, including oil majors Chevron, Eni (NYSE: E - news) and BG Group (LSE: BG.L - news) that is developing the Karachaganak field, produced enough to fill one full-size cargo and offered it at a tender.

"People have been working on this plan for a year, thinking how to store oil in Russian pipelines and sell a full cargo," a source familiar with the tender results said.

The tender attracted a flurry of bids from Vitol's rivals Glencore, Trafigura, Eni, Royal Dutch Shell (Xetra: R6C1.DE - news) , Petraco and Chevron, according to traders.

World No.2 crude trader Glencore, Vitol's biggest competitor, won the tender and will ship the cargo from the Russian port of Ust-Luga on Oct. 21-22, traders said.

Glencore declined to comment.

Trading sources said the deal could be repeated.

"It is not a one-off deal. Depending on how much KPO produces, it will continue offering crude at such tenders. And Glencore will be invited to bid for them," the source said.

LONG PARTNERSHIP

Aggregating small volumes of oil into full-size tankers has become an important business for Vitol in recent years.

In September, Vitol marketed nine cargoes of Kazakh crude from the Russian Baltic ports of Primorsk and Ust-Luga totaling 6.6 million barrels, worth around $700 million or equal to an annual turnover of $8 billion. In October, it will market eight.

Traders said they were confident Vitol would maintain its leading position in Kazakh oil exports because only a limited number of producers and projects in Kazakhstan would be able to ramp up output sufficiently to fill full-size tankers.

Apart from KPO, only state oil firm KazMunaiGas and Mangistaumunaigas, a venture by China's CNPC, can produce enough oil, an industry source said. "All others supply definitely below 100,000 tonnes a month," the source said.

Kazakhstan's oil minister said the way Kazakh oil exports reach markets was changing as the Kashagan consortium launches production.

"Under the Kashagan agreement, every participant of the consortium is free to sell oil himself and therefore decide on the route, where to sell and for how much," Uzakbai Karabalin said this week.

The consortium including Exxon Mobil, Shell (LSE: RDSB.L - news) , Total and Eni launched the field last month following a decade of delays and after spending more than $50 billion.

It is forecast to be ultimately pumping 400,000 bpd and companies such as Eni and Total (NYSE: TOT - news) are expected to use the Russian route as they have no stake in the CPC pipeline.