Leading oil trading firms are diversifying their energy and commodity spending to position themselves for a lower-carbon future, but their continued investments in upstream oil are underpinned by expectations of a volatile energy transition.
The big commodity trading companies see an advantage in moving away from hydrocarbon-focused business models under a new financing focus on environmental, social and governance issues. "This industry is heavily focused on the movement of hydrocarbons," Vitol chief financial officer Jeff Dellapina told the FT Commodities Global Summit last week. "We are going to follow energy demand. On a proportional basis our activity in electricity, gas and carbon trading is all going to rise."
Other trading company executives point to their ability to manage trading risk as an asset in the energy transition, particularly in the highly volatile price environment of electricity markets, with variable dispatch levels from renewable power. "We have this advantage of being well connected to these greener sources of energy," Mercuria group chief financial officer Guillaume Vermersch says. "More than 60pc of our revenues are extracted from our non-oil activities."
Trafigura group chief financial officer Christophe Salmon points to a similar diversification: "We trade metals, and metals play a very important role in the energy transition. Our strength is we have a very good understanding of the global supply chains." And Gunvor group chief financial officer Muriel Schwab predicts: "There will be plenty of opportunities in the renewables industry. We have been shifting our own trading activities pretty dramatically into transition commodities." Whatever the energy scenario that develops, "the role of commodity traders is to smooth out inefficiency in the market", Schwab says.
The pace of transition will depend on policy decisions such as those that emerge from the UN Cop 26 climate conference in Glasgow this year. Mercuria chief executive Marco Dunand points to an unprecedentedly wide range of oil price scenarios over the longer term, including crude hitting $100/bl or falling below $50/bl as a result of that policy uncertainty.
Plugging the gap
Vitol chief executive Russell Hardy is not convinced that the oil market faces the kind of super-cycle that some see emerging for other commodities in the energy transition. But Vitol and its peers see the prospect of continued under-investment by the oil sector resulting in a possible supply gap in 2025-35 if oil demand recovers in the period to 2030 and then plateaus, before declining longer term.
This is why Vitol is making continued upstream oil investments, while increasing its presence in renewable energy, Hardy says. It recently agreed to acquire Permian basin acreage through its US upstream subsidiary, Vencer Energy. And Vitol is making a longer term bet in Russia's upstream, aiming with partner Singapore-based Mercantile and Maritime Energy to buy a 5pc stake in state-controlled Rosneft's Arctic Vostok Oil project, at an expected cost of around €3.5bn ($4.3bn). Trafigura acquired a 10pc stake in Vostok Oil at the end of last year, paying €7bn. The deals are expected to provide the trading firms with long-term crude supply opportunities.
Some of the large trading companies reported record profits as a result of the extreme energy market volatility caused by last year's pandemic-led demand collapse, and the bigger firms expect to continue to benefit further from a "flight to quality" after a series of commodity scandals among smaller trading companies in Asia last year prompted some banks to reassess their lending to the sector. "Access to capital is more difficult, which is to our favour," Salmon says.
| Trading firms' oil trade volumes | mn b/d | ||
| 2020 | 2019 | 2018 | |
| Vitol | 7.1 | 8.0 | 7.4 |
| crude | 3.5 | 4.0 | 3.8 |
| products | 3.6 | 4.0 | 3.6 |
| Glencore | 4.2 | 4.8 | 4.7 |
| crude | 2.2 | 2.7 | 2.6 |
| products | 2.0 | 2.1 | 2.1 |
| Trafigura* | 4.9 | 5.2 | 5.4 |
| crude | 2.5 | 2.7 | 2.5 |
| products | 2.4 | 2.4 | 2.9 |
| Mercuria | na | 1.8 | 1.8 |
| crude | na | 1.3 | 1.3 |
| products | na | 0.5 | 0.5 |
| Gunvor | 2.7 | 3.0 | 2.7 |
| crude | na | na | na |
| products | na | na | na |
| Aramco Trading | 4.7 | 4.5 | 2.3 |
| crude | na | na | 0.1 |
| products | na | na | 2.1 |
| *Oct-Sep fiscal year | |||
