Major commodity traders are accumulating in the energy transition

Having traded goods since the 1990s, Bill Reed was beginning to worry that he had seen it all and that things were starting to get a little “boring”. But it was before governments, consumers and banks began to pull their weight behind the energy transition.

“I was not so optimistic about our industry. . . in a long time, “Castleton Commodities International’s executive director told the Financial Times.” One thing is for sure. The next 15 to 30 years don’t look like anything like the past 15 to 30. “

Fossil fuels, particularly oil, have provided bumper rewards for commodity traders who have navigated the extreme volatility of the pandemic market. But the sector now sees the move away from hydrocarbons not as a threat but a profit opportunity, as it seems to help manage the world’s move towards cleaner forms of energy.

Market leaders are already there sinking the number into renewable energy and looking to expand into rapidly growing markets such as the carbon trade, while continuing to invest in oil projects in the expectation that a supply gap will emerge over the next decade.

The race to play a major role in solar, wind and hydrogen is not without its risks. These are very competitive markets with much lower yields than in the oil trade. The two-track strategy of investing in both clean energy and fossil fuels also leaves companies vulnerable to accusations of green laundering by activists who exert an ever-increasing influence on the corporate world.

But according to JF Lambert, consultant and former commercial finance banker, “the big oil traders are making so much money at the moment that they can afford to make some mistakes.”

For Jeremy Weir, executive chairman of Trafigura, there is no contradiction in a two-track approach because the switch to clean fuels and electrification cannot happen overnight. “We can’t turn off the lights,” he told the FT Commodities Global Summit last week.

Trafigura has announced plans to build or purchase 2 gigawatts of solar, wind and energy storage projects through a joint venture. He expects to invest at low cost $ 2 billion by 2025, with power and renewables set to become a “very strong third pillar” of its business, according to Weir.

“I think it could be a significant profit contributor to our society,” he said. “In five years it’s definitely 10 years.”

At the same time building its renewable energy and power unit, Trafigura is spending 7.3 billion euros to acquire a 10% stake in Vostok Oil, a huge project in the Russian Arctic backed by President Vladimir Putin.

“This oil will be needed for the energy transition,” Weir said. In exchange for its investment in Vostok, Trafigura will have access to barrels of good crude oil to boost its immense business activity.

Supply and demand: Traders invest in fossil fuels and clean energy

Vitol, the world’s largest independent oil retailer, is also investing in the Arctic project, announcing an agreement this month to take a 5 percent Vostok stake.

Russell Hardy, executive director, expects oil demand to pick up to its pre-pandemic level of 100m barrels per day next year, rising to 105m-110m b / d before peaking in 2030.

“There is going to be a gap between 2025 and 2035 in terms of oil production compared to demand and so we feel we can invest some capital in that space,” Hardy told the FT summit.

Vitol has also spent $ 1 billion this year on U.S. shale assets. Jeff Dellapina, chief financial officer, sees a role for commodity traders in financing upstream oil production when major energy companies and banks retire and leave a funding gap. “It will help but not fill the forum,” he said.

Hardy insists Vitol will focus on energy transition projects, particularly renewable energy where it has already committed $ 1 billion in capital. He also expects power trading to become a “core competency” for the company because of the need to understand how electricity markets work in a decarbonizing world.

Investment in oil and natural gas

“They’re more complex in their pricing way compared to the oil markets because they’re very local,” he said.

Gunvor, based in Geneva, is another big trader looking to expand in the energy trade, but also maintains the oil trade, for which it expects strong demand for the next 10 years, as well as a gas natural burning cleaner which looks like a great fuel transition.

“Coal is the backbone of power generation, and in various parts of the world its use is actually growing,” Torbjörn Törnqvist, Gunvor’s managing director and co-founder, told the FT summit. “The closest substitute is natural gas.”

Meanwhile, the coal trade is capturing the attention of the industry that governments are considering mechanisms to price harmful greenhouse gases.

“A lot of counterparties are high emitters,” said Marco Dunand, co-founder of Mercury, which will direct half of its investments in energy transition projects. “And everyone is looking for a solution to reduce their carbon emissions.”

“There’s great commercial potential here,” added Alex Sanna, head of oil and gas marketing at Glencore. “Carbon markets will grow exponentially.”

However, it is unclear whether these new markets can still be as profitable as oil, which helped Gunvor, Trafigura, Vitol and Glencore record profits last year.

Chart line of € per tonne showing coal trading prices in the EU

Trafigura’s energy and renewables unit, which includes coal, lost money in the six months to March, although it is expected to be profitable in the second half of the company’s financial year.

“When you trade electrons, you trade them every second. There are no warehouses, or cisterns… Where you can store electrons. There are no ships,” said Laurent Segalen, clean energy investment banker and founder. of the Megawatt-X advisory group. “So I don’t see the kind of profit in the energy trade as in the oil and gas trade.”

Nigel Scott, global leader in structured commerce and commodity finance at Sumitomo Mitsui Banking Corporation, believes the challenge for commodity traders and the new entities they are setting up is that they are “going into lower margins. .and it’s more about utility type trading. “

But as peak oil demand grows on the horizon, and lenders grow more nervous about fossil fuel loans, commodity traders may have no choice but to evolve.

“This is a big step into the unknown for most oil traders,” Lambert said. “But the concept of ‘Tina’ applies: there is no other alternative.” »

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