China's customs authorities detained a Glencore trader as part of an investigation into the potential evasion of millions of dollars in taxes on fuel imports, sources with direct knowledge of the situation said on Friday.

Chinese customs authorities have since late last year been looking into imports of power kerosene, a fuel of a quality between diesel and kerosene that can easily be turned into diesel, but is not subject to a hefty consumption tax which otherwise applies to diesel or kerosene.

China levies a consumption tax of about $125 per tonne on imports of diesel or jet kerosene, but power kerosene is exempt.

Li Buhua, a Chinese national who is a member of Glencore's Beijing-based trading team, was detained by local customs authorities and released last week on bail, sources with direct knowledge of the situation told Reuters.

Glencore confirmed an employee had been detained but did not identify him. It said it sold 120,000 tons of mixed kerosene and power kerosene, which was stored at a Singapore tank farm. The customer, Guangdong Zhenrong Energy, took the cargo away in four ships over a period of about two months.

These were cargoes that were sold 'free-on-board' at Singapore to a Chinese customer - the title and economic interest transferred to the customer at Singapore, a Glencore spokesman said. It's not clear to us why our field officer was arrested. We presume it was to help the authorities.

Officials at Zhenrong's Beijing headquarters were not immediately available for comment.

The investigation involves a 100,000-tonne cargo Glencore brought in through China's Zhuhai customs port late last year, said the sources. On those figures, the shipment would be worth around $80 million and value of the tax would be about $12.5 million.

It's still being investigated. There is no conclusion yet, said a trader with direct knowledge of the situation. Glencore is only one of the suppliers, the trader added.

The Swiss commodity trading giant, valued earlier this year by one analyst at about $60 billion, is preparing for what could be a record London initial public offering (IPO). Bankers said the investigation would have no impact on the share sale.

All five sources declined to be identified because of the sensitivity of the case.

POWER KEROSENE BOOM

The customs authorities also detained another trader from chemical firm Kolmar and that trader was also released on bail, sources familiar with the situation said.

Nobody at Kolmar was immediately available for comment. A spokesman with China's General Administration of Customs said he could not comment immediately and would check with relevant departments.

Mostly sourced from Asia oil hub Singapore, oil major BP and one or two Western trading houses were among the suppliers of power kerosene, traders told Reuters last year.

The power kerosene boom helped push overall kerosene imports to a record 861,000 tons in November. That coincided with a shortage of diesel in China, the result of a crackdown on coal use which spurred many power users to switch to stand-alone diesel generators. The fuel was treated by regional customs departments as neither diesel nor aviation fuel, traders said.

It has a potential legal risk because of the tax issue involved, one Beijing-based senior trader said in December. But you can't really blame these suppliers as China's diesel shortage forced traders to become more creative. The customs authorities started to probe the trades after Sinopec Corp <0386.HK>, the country's largest refiner, complained to the authorities about the exotic oil flows.

Traders said it was not clear why these companies were singled out as other sellers were involved in similar trades.

The companies involved collaborated with Chinese officials and swapped around the names of the import goods, taking advantage of loopholes in Chinese customs regulations, Chinese paper The 21 Century Business herald reported the case on Thursday, citing one source with knowledge of the case. China's overall kerosene imports are traditionally dominated by jet kerosene, the grade used for aviation fuel. But late in 2010 imports of other grades suddenly took off, peaking in December when the volume even surpassed that of jet fuel. Since then kerosene imports appear to have returned to normal, according to data from China's Customs office. The trade in power kerosene may also have thinned out because the rush to import the fuel pushed prices up to more than the cost of diesel.

Global commodities companies have run into trouble with Chinese authorities in the past.

In a more serious case, Rio Tinto's former chief iron ore salesman in China, Stern Hu, was last year jailed for 10 years for accepting bribes and stealing state secrets. Hu's three Chinese colleagues were also jailed.

(Additional reporting by Tom Miles and Niu Shuping in BEIJING and Quentin Webb in LONDON; Editing by Lincoln Feast)

China Energy