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Commodity traders eye growing oil, gas asset opportunities but rising ESG scrutiny


Oil majors are accelerating asset sales in pivot to clean energy

Vitol sees traders as small players in global upstream industry

Gunvor flags rising pressure from lenders over ESG metrics

  • Author
  • Robert Perkins
  • Editor
  • Daniel Lalor
  • Commodity
  • Energy Energy Transition Natural Gas Oil
  • Topic
  • Energy Transition

Independent commodity traders see a growing role as owners of producing oil and gas assets but are feeling rising pressure from banks to align their investments with environment targets, the financial heads of some of world biggest trading houses said June 16.

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With many Western integrated oil companies starting to wind down their oil and gas investments and selling upstream assets as they pivot to cleaner energy, commodity traders have been tipped to pick up some of the resources being shed by renewable-focused energy majors.

Vitol, the world's biggest independent oil trader, this year acquired producing US shale acreage in the Permian's Midland Basin from Hunt Oil and last week agreed to jointly buy a 5% stake in Russia's Vostok Oil megaproject with Mercantile & Maritime.

RELATED: ESG momentum may influence oil, gas funding, midstream valuations: S&P Global Ratings

"I think we will be an increased participant in that, certainly on the production side over the next few years," Vitol CFO Jeff Dellapina told the FT Commodities Global Summit.

"We are a natural player to invest a little bit of capital into that side of it."

Dellapina said Vitol will look for upstream assets with a short payback cycle, given growing uncertainty over future oil and gas demand. He said, however, that commodity traders will likely only play a small part in maintaining future oil and gas supplies.

"The commodity trading sector still deploys most of its capital into the core intermediation business, so we can make a dent in it but it would be a very small dent," he said.

Trafigura CFO Christophe Salmon said while the trading house was growing its renewables and non-oil business, it remained "pretty open" to its investment opportunities.

Trafigura recently paid Eur1.5 billion ($1.8 billion) of its own cash for a 10% Vostok stake, which Rosneft has valued at Eur7 billion.

Half and half

Speaking at a separate event, the CEO of commodity trader Mercuria Marco Dunand said his company remained interested in short-cycle oil and gas investments but reiterated a target of ramping up spending on low-carbon, transition energies.

Estimating that global oil demand will likely recover close to pre-pandemic levels of 100 million b/d by year-end, Dunand told the S&P Global Platts Global Executive Petroleum Virtual Conference: "That is not going to disappear by any means, so we very much want to be involved in the oil market."

Dunand said Mercuria was looking for potential investments in mature, or advanced stage field developments rather than a multi-year, greenfield project such as Vostok with a long payback period.

"But we see for every time we actually allocate a purchase of oil or gas field somewhere, we are going to have to find ways to invest a similar amount of money into the energy transition."

Last year, Mercuria pledged to direct half its investments into renewables over five years, a target Dunand said the company is on track to achieve "quite easily".

Last year the company agreed to invest in a $1.5 million US-based renewable energy fund with two private equity firms. The fund, Broad Reach Power, is investing in utility-scale battery storage operations in the US.

Mercuria has more recently acquired Beyond6, US company providing renewable gas to trucks in addition to battery tech projects in Europe.

ESG pressure

Gunvor CFO Muriel Schwab concurred that large commodity traders will be unlikely to "take a big chunk" of the opportunities for investing in hydrocarbons, highlighting the rising bar of environmental, social, and corporate governance (ESG) metrics being rolled out by financial institutions.

Banks are pivoting to offer more financing for renewables or transitional commodities such as LNG and are also incentivizing projects with lower capital and margins to support sustainability, Schwab told the FT panel.

"We have to meet certain requirements around sustainability ESG standards and we see that pressure coming from banks, coming from investors coming from regulators," Schwab told the event. "We see banks that clearly have decided that they will no longer support commodity traders or corporate that do not have a clear path and a clear ambition, around the energy transition,"

Schwab said most of Gunvor's bank lenders are setting up new ESG departments to vet their loans. "I think that is going to be the new compliance or the new credit [departments] in the future."

The Geneva-based trader has diversified into other commodities and last year 44% of its trading volumes were in 'transitional' commodities such as biofuels, natural gas and LNG.

This year Gunvor pledged to invest at least $500 million under a new renewables energy and non-hydrocarbon technology unit as part of a push to slash its carbon emissions and trade more sustainable commodities.

Following Schwab's comments, however, CFOs at rival traders distanced themselves from characterizing rising ESG lending requirements as a 'pressure'.

Mercuria CFO Guillaume Vermersch said ESG metrics were more an "alignment" of the company's "methodologies and communications" with climate milestones.

Trafigura's Salmon said he saw no pressure from lenders if companies are "proactive" on ESG metrics. "We have taken a very, very proactive approach starting years and years and years ago."