Royal Dutch Shell Plc  .com Rotating Header Image

Reuters: As BP trims oil trade risks, Shell’s appetite grows

Fri May 11, 2007 10:25 AM BST

By Jonathan Leff

SINGAPORE (Reuters) – When Royal Dutch Shell’s senior oil traders gather for their annual meeting next week, they may speculate on a topic that’s not on the agenda: challenging BP’s reputation as the industry’s top trading firm.

Some traders say that’s unlikely for now. But most agree a shift is underway that may change the shape of the oil market.

Besieged by bad publicity over its U.S. trading, BP seems to have lost some of its risk appetite, key assets and a few traders. Emboldened by growing success, Shell looks ready to play a bigger role, and pay better for those who can help it.

“The trading earnings have quadrupled over the last five or six years and have become very important for us,” Rob Routs, whose role running Shell’s downstream business includes its trading operations, told Reuters in an interview last month.

Despite producing nearly as much crude and refining far more than BP, Shell has spent a decade in the shadow of its brasher rival, whose image as a dynamic and risk-hungry trader dates back to the early 1980s, when it led an industry shift away from vertical integration to help create the spot oil market.

Traders say it is difficult to pinpoint how or where Shell is trading differently in the murky oil market, where it can make hundreds of millions of dollars by exploiting different prices worldwide or leveraging derivatives positions, activities shunned by top oil firm ExxonMobil .

But they see clear signs of it in other ways.

Shell , which like BP faces the rising risk of losing its best traders to fatter bonuses at hedge funds and banks expanding in the sector, has improved its remuneration packages and has shown a new willingness to hire outside the company, sources say.

“The gap is still there, but it has narrowed,” says a former Shell trader, lured by bigger rewards at a trading house.

By contrast, BP lost some 16 oil traders during the March job-swap season, unusually high for a company said to pay better than its peers. Some said the traders may have feared a more risk-averse atmosphere would hurt bonuses.

BP made “internal improvements” in its trading compliance processes following allegations last summer by U.S. regulators that it manipulated propane prices in 2004 — a charge BP denies — and investigations over gasoline and crude oil trades in prior years, the company said in its annual report.

“If BP was maybe a bit too much on the aggressive end, Shell was probably a bit overly cautious,” said Craig Pirrong, director of energy markets at Houston-based Global Energy Management Institute, who also consults on legal cases of energy trading.

“One way to interpret it is they’re meeting in the middle.”


Although analysts say most oil firms trade more conservatively now than they did in the 1990s and early 2000s, when high-profile leveraged trading plays proliferated, rising prices and volatility mean many are wagering more money.

But at BP, whether in reaction to its woes or not, oil traders cut back their average daily exposure to the market by $4 million (2 million pounds) in 2006 versus 2005, the first decline since a five-year oil price boom prompted a surge in trading activity and profits.

At a daily value-at-risk (VaR) of $29 million on oil markets last year, BP fell behind Goldman Sachs and Morgan Stanley for the first time as the two top derivatives traders stepped up their exposure to commodities markets.

Including power and gas trading, BP’s energy trade risk was almost unchanged last year, and it remained the biggest trader in the industry by VaR, an estimate of the maximum amount of money a company could lose in a single day.

A BP spokesman said the drop reflected market conditions and not a “conscious decision” to reduce VaR. BP says overall energy trading volumes were similar in 2006 to 2005.

Oil trading has been very profitable for BP, raking in $1.55 billion in 2005, the last year for which it disclosed the figure, up from around $600 million in 2002. Shell does not disclose its revenues on energy trading operations.

But against a $22 billion bottom-line profit in 2006, BP would seem to have little incentive to push the envelope, and a more conservative stance could find favour with investors who fear further reputational damage from any more bad publicity.

“They need to be aware of the markets, but looking aggressively for opportunities is maybe not the way forward,” said Jason Kenney, equities oil analyst at ING in Edinburgh.

Shell risked a smaller $12.5 million daily on oil markets last year, the first time it has published the data.

The company declined to say whether this was up or down versus 2005, and Routs said he saw little cause to raise it.

While Shell has also crossed U.S. regulators, time has helped heal its wounds. In 2004 its U.S. gas and power trading arm Coral Energy paid $30 million to settle charges it reported fake natural gas trades. Coral did not admit or deny wrongdoing.

Shell puts more money at risk in oil markets than Total , long a major player in Europe and growing in Asia, whose VAR in oil fell to about $11 million from $12 million.

“It does feel like Shell are being more entrepreneurial,” one veteran trader said.


Many traders saw other factors behind the apparent shift, including company-wide — but possibly temporary — risk aversion at BP and strategic asset sales by both.

The BP spokesman said there was no plan to reduce the number of traders and they would employ more “as the business grows”. But for traders, some valuable parts of the business have shrunk.

While both have moved to sell off refineries, BP has shed key plants like Lavera and Coryton, while Shell is trying to sell three plants in France of limited benefit to the trading desks.

“I think Shell has benefited a little from a less competitive European environment,” said one senior oil trader. “I would say they’re naturally in a stronger position than three years ago, but I’m not sure it’s a function of higher risk appetite.”

BP has also seen its strong position in the U.S. crude market weaken due to its shrinking share of oil tank storage in Cushing, Oklahoma, the delivery point of the U.S. WTI futures contract and a flashpoint for past focus on BP’s trading activities.

Some of Shell’s natural strengths are on the rise.

It is the biggest non-government producer of Asian marker Oman crude, which may become more important with a new futures contract, and operates the Gulf of Mexico Mars oilfield, touted as a possible high-sulphur benchmark alternative.

However, Routs has no intention of giving too much leeway.

“If you are in this business, your controls have to be very, very strong,” he said. “These are good guys, but if you don’t watch them and keep close controls… it runs away from you.”
© Reuters 2007. All rights reserved. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Reuters: As BP trims oil trade risks, Shell’s appetite grows”

Leave a Comment

%d bloggers like this: