EU, Singapore Trade Tax-Free Oil Deal May Start End 2014

A free-trade agreement between the
European Union and Singapore that removes taxes on jet fuel and
diesel imports to the continent will come into force as early as
2014, potentially boosting petroleum shipments to the EU.

The full ratification process will take about two years
from Dec. 16, when a draft deal was reached, the Singapore Trade
Ministry said yesterday in an e-mail. The pact is similar to an
accord between the EU and South Korea that led to an
unprecedented flow of North Sea crude oil to the Asian nation.

The EU and Singapore are seeking to build on the growing
trade in goods, estimated at S$106 billion ($86 billion) in 2011
by the island nation’s trade ministry. Removal of taxes would
allow refiners in Singapore, such as Royal Dutch Shell Plc (RDSA) and
Exxon Mobil Corp. (XOM), to ship so-called distillate fuels including
diesel to the EU, opening an export route that is dominated by
companies in India and the Middle East. It may also exacerbate
worsening refining profit margins in Europe, where the second
recession in four years is cutting demand.

“This could be disastrous for European refiners,” Olivier Jakob, managing director at Zug, Switzerland-based Petromatrix
GmbH, said by phone Jan. 25. “The FTA with Korea is already
taking crude out of Europe and increasing the cost of it for
Europeans, now you have another challenge for them with
competition for distillate flows from Singapore. It’s already
bad for them and is going to get worse.”

Export Refiner

Singapore, Asia’s largest export refiner, ships oil
products including gasoline, diesel and jet fuel to nations as
far away as the U.S., according to government data. The EU
currently imposes a 4.7 percent tax on jet fuel and 3.5 percent
tariff on diesel imports from Singapore.

Asian gasoil, a benchmark for diesel and jet fuel, for
February settlement was at a discount of $18.22 a metric ton to
European prices as of 4:15 p.m. London time, according to data
compiled by Bloomberg. Import taxes and shipping costs erode
potential profits in moving fuels to other markets.

“Complex refineries in Asia are able to process heavy and
cheaper crude to produce top of the barrel oil products at a
much lower cost and are hence able to export products to
destinations as far as Europe at a competitive price,” Abhishek Deshpande, an analyst at Natixis SA in London, said today in an
e-mailed response to questions.

There are currently no taxes levied on EU petroleum or
crude imports into Singapore.

The pact will be presented to EU legislators for approval
by May, a government official involved in the talks said Jan.
25, asking not to be identified, citing policy.

Crude Flows

A free-trade deal between the EU and South Korea prompted
the flow of crude exports to the Asian nation. The European
Parliament approved that deal in February 2011, overcoming the
final hurdle to the agreement, which then took effect in July
that year.

At least 53 million barrels of North Sea crude have been
exported to South Korea since the agreement that exempted
refiners in the Asian nation from a 3 percent tariff began. That
is equivalent to about three weeks of imports.

“The EU and Singapore will now seek approval for the deal
from their respective political authorities and envisage
initialling the draft agreement in Spring 2013,” the EU said in
a Dec. 16 statement, citing Trade Commissioner Karel de Gucht
and Minister of Trade and Industry Lim Hng Kiang.

The accord still requires the approval within the European
Commission and by EU member states and the European Parliament.
We “cannot give a precise forecast as to when they will all be
completed and the FTA will enter into force,” John Clancy, a
trade spokesman of the commission, the 27-nation EU’s executive
arm in Brussels, said by e-mail on Jan. 25.

Jet Fuel

Buyers in Europe were to import about 1.4 million tons of
jet fuel from the Middle East and Asia this month, according to
a Jan. 21 Bloomberg survey of six traders and brokers who
specialize in the trade of the aviation fuel. The increase is
from 1.5 million tons in December when volumes rose to the
highest in three months.

Singapore, which has refining capacity of about 1.4 million
barrels a day, roughly equal to U.K. consumption, didn’t export
any jet fuel or diesel to the EU in the five weeks through Jan.
30, data from the trade ministry show.

In the first half of last year, the EU imported 8.8 million
tons of diesel a month from all countries, according to data
from the bloc.

Several European refineries have reduced production
counter-seasonally due to a fall in processing margins and more
will probably curb operations if profits don’t recover, the
International Energy Agency said Jan. 18 in its monthly report.

Shell’s Pernis facility in the Netherlands and Exxon
Mobil’s Fawley in the U.K. were among sites operating at reduced
rates, the IEA said citing press reports.

Singapore’s Trade Ministry said in December that local
exporters of electronics, pharmaceuticals, chemicals and
processed food products will benefit from the removal of EU
tariffs.

To contact the reporters on this story:
Raj Rajendran in London at
rrajendran4@bloomberg.net;
Ann Koh in Singapore at
akoh15@bloomberg.net

To contact the editor responsible for this story:
Stephen Voss at
sev@bloomberg.net

EU, Singapore Trade Tax-Free Oil Deal May Start End 2014