Exclusive: Arcadia may have rigged Yemen exports: cable

By Brian Grow and Joshua Schneyer

ATLANTA/NEW YORK | Wed Jun 1, 2011

ATLANTA/NEW YORK (Reuters) - Oil trading firm Arcadia Petroleum, sued by regulators last week for allegedly manipulating U.S. oil prices, used hardball tactics in Yemen to buy the country's oil exports at below market prices, until authorities revamped their sales process to break the trading house's "long-standing monopoly", according to a confidential State Department cable.

The September 2009 cable says that an internal government shift in control over the country's valuable oil exports, meant to open up oil bidding to more international buyers, threatened Arcadia's sway over Yemen's exports.

It also put at risk an alliance between Arcadia and its "local agent" in Yemen, tribal leader Hamid al-Ahmar, the cable says. Arcadia, in an interview, denied the allegations in the cable, saying it did not employ al-Ahmar as an agent, although it did work with some of his companies in the oil trading business. The company said it always paid official market prices for Yemen's export oil.

NEW OIL BOSSES

In a bid to increase transparency, the government of Yemen in March 2009 yanked control of oil export pricing away from officials in the country's Ministry of Oil, and handed it to an oil council controlled by the son of President Ali Abdullah Saleh, including officials from several government departments.

The shift was meant to end Arcadia's buying of a large portion of Yemen's government-priced export crude at "below-market value", according to the cable, which was obtained by Wikileaks.

Oil traders in Asia who have also been involved in Yemen exports confirmed to Reuters the change in policy. Before the change, many potential buyers would not bid for Yemeni crude because they saw the market as stacked in favor or Arcadia, even though it had a nominally competitive bidding process, the traders said.

"Arcadia almost always won oil export tenders because Arcadia had an "agent" in Yemen. Other international companies such as BP and Chevron were reluctant to participate in the bidding," said an Asian crude oil trader with a major buyer.

The 2009 pricing shift was "a crackdown on corruption and some (government) officials who were in charge of oil export tenders were fired," the trader added.

Stephen Gibbons, CEO of Arcadia's Singapore office, said that al-Ahmar was not the company's agent in Yemen. "He is not our agent and wasn't actually earning anything from us. He has companies in Yemen which we have worked with," Gibbons said.

Cited in the cable, al-Ahmar bragged to an economic official from the U.S. Embassy that he earned $50,000 per month from Arcadia, but the amount was "an infinitesimally marginal part of my income." Global oil trading firms often hire a local agent to secure access to domestic supplies, or improve the odds of winning tenders.

Many of the firms staff small, local offices in countries where they do business, and rely on local agents for access to senior officials and decision-makers. A strong relationship with officials can be an important factor in getting access to coveted supplies.

OTHER SCARE TACTICS?

But the State Department cable, citing a highly-ranked government official, says al-Ahmar and Arcadia took this further and "scared away potentially more competitive bidders by threatening to kidnap their representatives."

On Wednesday, Reuters contacted the official cited in the cable, who repeated the allegation that Arcadia made kidnapping threats in Yemen. Neither the official nor the cable provided specific details of the alleged threats.

Reuters agreed not to name the official at the request of the State Department. "This kidnapping stuff is ludicrous. I completely refute that. It is the kind of thing that could come from competitors, or from the enemies of al-Ahmar," Arcadia's Gibbons said. "This is Yemeni politics. Remember that al-Ahmar is a bitter enemy of (President) Saleh."

The government is currently locked in a near civil war with rebels aligned with al-Ahmar, though at the time he was described in the cable as a powerful leader of the Hashid tribe and a businessman.

The State Department cable was signed by former Ambassador Stephen Seche and sent to six U.S. embassies, the Departments of Treasury and Commerce, and officials at the Joint Chiefs of Staff.

Since the cable was sent in 2009, Arcadia, which is controlled by Norway's billionaire shipping magnate John Fredriksen, has played a diminishing role as a buyer of Yemen's oil exports. The cable says the revised bidding process attracted several other foreign bidders, including China's Unipec, Swiss-based Trafigura and British oil giant BP (BP.N).

COMPETITIVE THREAT

The increased competition challenged "the crude oil sale monopoly long held by London-based Arcadia Petroleum Limited and (Hamid al-Ahmar)," according to the cable. It was made available to Reuters by a third party.

The State Department declined to comment. The cable says that the prices Arcadia received were influenced by al-Ahmar's powerful connections as the company's agent. Arcadia denied that.

"We have had no advantage on prices. There is an open and clear bidding process. Official selling prices have applied to us and everyone else who lifts crude from Yemen," said Gibbons.

Located on the southern tip of the Arabian Peninsula, Yemen is a relatively small oil producer and exporter relative to its neighbors in the Middle Eastern Gulf. But oil sales are the lifeline of the economy, making up 75 percent of government financing and more than 90 percent of export earnings, according to the Department of Energy.

MONOPOLY PLAY

Al-Ahmar and Arcadia allegedly did not stand idly by. In July 2009, "Arcadia sought to wipe out its competition by buying Yemeni oil at an artificially high price designed to temporarily scare away competitors," the cable said.

Arcadia allegedly bid $1.02 per barrel above the world-market price for Brent crude, when it had previously bid 2 to 3 cents below world prices, according to the cable.

The trade generated an extra $3.4 million profit for the Yemeni government that month. The London-based company was pushed into the spotlight earlier last week when the U.S. Commodity Futures Trading Commission sued it, along with two other firms owned by Fredriksen and two oil traders, in federal court in Manhattan, for allegedly manipulating the U.S. oil market in 2008.

Arcadia is among the world's largest private oil trading firms and typically markets around 800,000 barrels per day of crude and oil products worldwide. Its Yemen crude "book" has been among the company's most prominent trading positions, along with Nigeria, where Arcadia has long-term contracts.

Arcadia has continued to bid for and buy Yemen crude from the government since the change in policy in early 2009, most recently buying 3 million barrels last month.

However, Yemen has awarded most of its recent monthly export tenders to oil refiner Unipec, a unit of China's state-run oil giant Sinopec.