Peer Strategy

Traders Flag Transition Risks

Copyright © 2021 Energy Intelligence Group
  • The energy transition will create more price volatility for years to come, according to the heads of leading oil trading firms.
  • While trading firms are investing more in renewables across the board, they warned that developing hydrogen as a viable fuel will take several years to evolve.
  • Gas and LNG trading are growing in importance for traders, as demand in Asia continues to increase and new supply comes on stream.

The Issue

The world’s top oil traders are already investing substantially in renewables and they are under pressure to do even more. But at this year’s Energy Intelligence Forum the heads of three leading trading firms — Vitol, Trafigura and Gunvor — injected a note of caution by warning of future price spikes as the transition accelerates, pointing out that global oil and gas demand will not drop off for at least another decade. They also underlined that the scale of the transition, both in terms of cost and technology, would be huge.

Adapting to the Future

Having recorded bumper profits from last year’s market turbulence, the big trading firms are stepping up investments in renewables — including wind, solar, battery technology and, on a more limited scale, hydrogen. As they are dependent on bank finance, it is an adjustment that has been largely forced upon them.

But the message from three trading firm CEOs at the Forum was: be careful what you wish for. They said skyrocketing gas prices in Europe and parts of Asia were a harbinger of volatility to come, with underinvestment in oil and gas likely to create more price distortions in the future. Gunvor boss Torbjorn Tornqvist said it was “inevitable” that oil and gas demand would increase in the years ahead, while Vitol CEO Russell Hardy said it would be at least another decade before demand hits the downward curve. “Trying to get the balance right through a transition is a tricky task,” he said. Jeremy Weir, the CEO of Trafigura, called the current supply crisis “explosive” and said the revival of coal production shows the scale of the challenge that lies ahead.

Vitol, which trades more than 7 million barrels per day of oil, has made the biggest push into renewables among the traders. Earlier this year, it acquired a 10% stake in a Norwegian green hydrogen company, Gen2 Energy, and more recently it teamed up with electric vehicle giant BYD to pursue new markets for the Chinese company’s vehicle fleet. Hardy said Vitol is looking to run hydrogen at its UK power plants, but he said it would take “five years-six years” to develop the technology.

Trafigura boss Weir agreed that hydrogen is a fuel for the future. ”It’s not there now,” he said. “I think it can come reasonably quickly, but not tomorrow.” Tornqvist pointed out that developing new green technology requires more production of strategic metals, such as copper, which could exacerbate volatility in commodity prices.

Riding the LNG Wave

The trio of trading firms all agreed that gas, especially LNG, will grow in importance as a bridging fuel between oil and renewables. Describing current LNG markets as “very exciting but worrying,” Hardy said Vitol was stepping up volumes, while Tornqvist said gas, LNG and power were the fastest growing parts of Gunvor’s portfolio. This was borne out in the company’s first-half results, which showed that its LNG volumes increased 13% to 6 million tons, maintaining its No. 1 spot among the trading houses. Trafigura is also growing its volumes, with an emphasis on Far Eastern markets.

A decade ago, traders were nowhere to be seen in LNG; now Gunvor, Vitol and Trafigura handle over 40 million tons per year between them and volumes are certain to grow as new supply comes on stream and the spot market in Asia expands further. The traders are also handling more dry gas: Gunvor’s volumes during the first half of the year in this part of the gas market ballooned more than 60%.

Upstream Opportunities and Risks

While trading firms remain focused on their core business of buying and selling oil, some have decided to invest part of their spare cash in the upstream sector. This year Vitol acquired, via its US upstream company Vencer Energy, the Midland Basin assets of Hunt Oil. It then signed a deal in alliance with Singaporean trader Mercantile and Maritime to buy from Rosneft a 5% stake in the Vostok Oil venture in the Russian Arctic. At the end of last year, Trafigura bought 10% of Vostok for more than $8 billion, most of which was financed via a Russian bank.

The three CEOs said they would continue to look at upstream projects, but that these would make up only a small portion of their overall capital. Hardy noted that it is becoming harder to invest in oil as a stakeholder, and he emphasized that whatever funds Vitol invests upstream it would allocate a similar amount to energy transition projects. Both Weir and Tornqvist said there were still opportunities out there, with asset valuations dropping by up to 50%, but they pointed out that the important thing is to develop resources in a responsible way. Another key factor is the ongoing difficulty with raising capital to invest in upstream assets, as more banks move away from fossil fuels and switch their attentions toward renewables.

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