Analysis: Singapore Hin Leong's oil assets have strategic value for China's state oil companies

Singapore — A stake in Singapore's Lim family's petroleum, storage and shipping businesses could give a huge strategic advantage to China's national oil companies in accessing fuel supply chains in Southeast Asia and ramping up their refined product trading capabilities.

The state-run companies are not the only ones willing to bail out the Lim family's oil trading firm Hin Leong Trading, or HLT, and shipping business Ocean Tankers Pte. Ltd., or OTPL, which are seeking a rescue package after the company filed for bankruptcy protection April 17, including capital injection from new investors.

China's state-run China Petroleum & Chemical Corporation, or Sinopec, the world's largest refiner by capacity, has been "asking questions" about Hin Leong in Singapore's oil trading circles, several sources have said.

The other NOC of significance is PetroChina, China's largest oil and gas producer, but it already holds a 25% stake in the Lim family storage business Universal Terminal, and a 50% share in Singapore Refining Company.

"I believe that the fully integrated business platform which OTPL and HLT can offer would be a valuable proposition to strategic investors," Lim Oon Kuin, billionaire oil trader and Lim family patriarch better known as OK Lim, said in the recent bankruptcy protection filing.

"In fact, one of the world's largest oil refining, gas and petrochemicals conglomerates headquartered in China has expressed interest in an investment into HLT and OTPL, and are currently at the stage of preliminary negotiations following entry into a Non-Disclosure Agreement," Lim said in the affidavit.

"Further, HLT has also in a short span of about a week received indications of interest from at least 2 other prominent players in the industry," he said, adding that he couldn't disclose the names of the investors. Market sources say these include commodity trading houses and Singapore's business conglomerates.

CHINESE INTEREST

Even before PetroChina's investment in Singapore, in the 1980s, Singapore's refineries processed Chinese crude oil and exported products back to them, at a time when China was still a crude exporter.

In 2010, there were reports of Hin Leong and Sinopec teaming up to build a refinery in Singapore, but the plan fizzled out. Sinopec's storage business Sinopec Kantons Holdings tried to build an $850 million storage terminal on Indonesia's Batam island, but that plan also failed.

Since then, Sinopec has emerged as the world's biggest exporter of refined products and currently accounts for about half of China's product exports comprising gasoline and middle distillates. This is set to rise in the coming years as China's refining capacity exceeds domestic demand.

Its trading arm, Unipec, intends to expand its trading profile to support product exports. Hin Leong's trading network that supplies transportation fuels across Southeast Asia would give a strategic boost to Sinopec's market share in the region.

Additionally, with the ongoing credit crunch, only Chinese state-owned companies have the deep pockets and investment appetite to fund an investment of this scale.

OUTSTANDING PAYMENTS

Sinopec and PetroChina also have leverage as major trade creditors to Hin Leong.

Lim said in his filing that PetroChina International (Singapore) had terminated contracts with Hin Leong for the sale of 10 ppm sulfur gasoil and 92 RON gasoline, and demanded for immediate payment of $23.87 million earlier this month.

PetroChina also asserted a claim against Hin Leong for retaking possession of petroleum products on the basis of a "retention of title" clause under the relevant contracts, the filing showed.

Separately, Hin Leong failed to make a payment of $49 million under a trade finance loan facility with Australia's ANZ Bank, for fuel volumes presold to Sinopec Hong Kong, which constituted an event of default, according to a letter dated April 8, in the filing.

In another letter in the filing dated April 10, Singapore bank DBS said a cargo of 785,997 barrels of ultra-low sulfur diesel on board the Ocean Voyager en route to Rotterdam was originally intended for Unipec under a sales contract between Hin Leong and Unipec.

"We have now been informed by you that the said sales contract has been cancelled," DBS said. It asked Hin Leong to arrange a suitable letter of credit, and barred Hin Leong from discharging or selling the cargo without its consent.

Hin Leong was also asked to pay $4.47 million as part of a shortfall in payment for discounting of letters of credit issued by a lender in Singapore for Unipec's invoices, the filing showed.

Ocean Tankers said in a separate filing that its $2.07 billion exposure to Hin Leong's trades include counterparties like PetroChina, who hold bills of lading for cargoes shipped on Ocean Tankers' vessels.

ANZ declined to comment. DBS, Sinopec and PetroChina didn't immediately respond to queries.

STORAGE VALUE

Hin Leong's mention of strategic investors has largely served to ease concerns among lenders, and several market sources expressed skepticism over the presence of any real value in the company, as the true asset of an oil trading firm -- its reputation -- is already in tatters.

The most valuable Lim family asset that remains is Universal Terminal, in which PetroChina has a 25% share, Macquarie has 34% and the Lim family has the remaining 41%.

PetroChina and Macquarie have first right of refusal for the remaining share, but they are unlikely to want operational responsibility, a storage operator said. They built it for $850 million in 2008 and it has a market value of $2 billion-$2.5 billion, so 41% still gets some money back, he added.