The Complexities and Economics of Oil Trading

Transcription

1 The Aspen Institute Forum on Global Energy July 9, 2014 The Complexities and Economics of Oil Trading Bryan Keogh Trafigura

2 THE ECONOMICS OF COMMODITY TRADING FIRMS What are commodity trading firms? Commodity trading is the process of transforming commodities in three main ways: 1. Space: Transportation of commodities from suppliers to consumers 2. Time: Manage mismatch in timing of commodity production and consumption 3. Form: Transform commodities to be suitable for required use Traders identify the most valuable transformations and engage in the physical and operational actions necessary to facilitate these Primarily concerned with price differentials, not the absolute level of commodity prices Highly fragmented market for most commodities An industry rooted in global trade and the real economy Commodity trading houses play a pivotal role in the supply chain bringing commodities from thousands of producers to millions of consumers around the world. Transactions are driven by supply and demand patterns rooted in the real economy Physical trading is not an on screen, dematerialised market; successful traders rely on their analysis and understanding of global supply and demand for various commodities, supported by a global network of offices and logistical assets Developing business requires a relationship driven approach: traders interact face to face with buyers and sellers in bilateral markets, resulting in bespoke, high value transactions. New business is sourced in a number of ways: through tenders by leveraging an extensive knowledge base, financing expertise and a broad portfolio of commodities through dedicated business developers through developing relationships with existing customers and customized solutions SOURCE Off take agreements with major points of supply Risk management, finance and marketing services STORE Storage at owned and leased facilities Strategically located terminals and warehouses worldwide BLEND Commodities blended to regional, market and customer specifications DELIVER Efficient, safe and high quality logistics Barge, truck, rail, pipeline and vessel operations globally 2

3 FUNDAMENTAL FACTS ABOUT PHYSICAL COMMODITY TRADING Trader versus Broker? We perform a straightforward economic role. We identify and act on imbalances between supply and demand. We achieve that by moving physical commodities from places where they are plentiful to where they are required. We act as long term partners to producers and end users of oil and petroleum products. We manage risk and improve market competitiveness. We negotiate off take agreements with oil producers, refiners. We source product in the spot and forward physical markets. We transform physical commodities Focused on margins (via price differentials) not on flat price levels Users of derivatives (primarily futures) hedging flat price risk Main market price exposure is to basis risk. 3

4 EFFICIENCY IS CRITICAL Even the best energy trading firms will typically achieve gross margins of 1 2%. The most successful companies are ones that can transact in large volumes to maximize optionality and manage the following risks: Interest rates Regulatory Price Currency Credit Compliance Risk Management Operational HSEC Performance & country Freight Liquidity 4

5 MEETING DIVERSIFIED NEEDS There are hundreds of different crude oil sources worldwide and each crude oil has its own unique mixture of thousands of hydrocarbons and other materials. There are also hundreds of crude oil refineries worldwide and each of them is designed to process a specific crude oil or a specific set of crude oils. Each refinery has its own unique configuration of petroleum refining processes that produces its own unique set of gasoline blend components. There are a great many different gasoline specifications that have been mandated by various local, state or national governmental agencies including seasonal differences. 5

6 MEETING DIVERSE SPECIFICATIONS BY REGION 6

7 EXAMPLE OF ARBITRAGE OPPORTUNITIES DIESEL DELIVERIES NORTH AMERICA Buy High Sulphur Diesel Houston (USGC) ARA USLD Delivery EUROPE USLD MED. ASIA HSD Sales to C. America H.S.D. West Africa AFRICA SOUTH AMERICA HSD/ULSD MV/BA Technical Arbitrage Trafigura s global storage and logistics network and blending expertise allows us to blend products to meet specific customer requirements This allows us to obtain onspecification products at the lowest possible cost Time Arbitrage Our storage network lets us take advantage of changing market conditions As an example, if forward prices are higher than spot prices (a contango market), Trafigura can buy cargoes and store them, selling the equivalent futures contract and locking in the price differential Contractual Arbitrage For some contracts, the seller can choose the volume delivered within a tolerance of +/ 10% This flexibility in volumes provides optionality to increase profit margins 7

8 EXAMPLE OF ARBITRAGE OPPORTUNITIES CRUDE/CONDENSATE (EAGLE FORD) Geographical Arbitrage NORTH AMERICA NORTH Midwest AMERICA Refinery * East Coast Refinery Canada Refinery *Capline Pipeline System to Midwest Refineries Technical Arbitrage Trafigura s global storage and logistics network and blending expertise allows us to blend products to meet specific customer requirements This allows us to obtain onspecification products at the lowest possible cost SOUTH AMERICA SOUTH AMERICA Time Arbitrage Our storage network lets us take advantage of changing market conditions As an example, if forward prices are higher than spot prices (a contango market), Trafigura can buy cargoes and store them, selling the equivalent futures contract and locking in the price differential Contractual Arbitrage For some contracts, the seller can choose the volume delivered within a tolerance of +/ 10% This flexibility in volumes provides optionality to increase profit margins 8

9 PETROLEUM SECTOR TRENDS VERTICAL DISINTEGRATION Retreat of oil majors from refining reflects in large part the efficiencies created by commodity merchants. The downstream market can be supplied by liquid and competitive markets. E&P s can allocate capital to and concentrate its efforts on production margin. Refiners can allocate capital to and concentrate its efforts on refining margins 9

10 TRENDS IN ASSET OWNERSHIP Commodity trading firms can transform commodities without owning assets (charter a ship, rent storage space, processing/tolling) Commodity trading firms quite diverse in their asset ownership patterns (Asset Light/ Asset Heavy) Common to say asset ownership provides optionality, but you can have optionality without ownership (shipping is a great example, or off take agreements) Asset ownership can mitigate transactions costs, notably costs associated with delays not under your own control 10

11 MARKET OPPORTUNITY The shockwaves of rising U.S. shale gas and light tight oil are reaching virtually all recesses of the global oil market These powerful forces are redefining the way oil is being produced, processed, traded and consumed around the world. There is hardly any aspect of the global supply chain that will not undergo some measure of transformation over the next five years. (1) 1 Medium Term Oil Market Report, IEA, May

12 US SHALE REVOLUTION HAS LED TO A SURGE IN PRODUCTION A major contributor of US liquids production growth has been in large part driven by the rapid ramp up at Eagle Ford since North American Regional Shale Production Average Daily Production (kbbl/d) 2014E 2018E 2020E Average Daily Production (mbbl/d) 9,000 8,000 7,000 6,000 5,000 4,000 3,000 Permian 1,276 1,844 1,936 West Coast Eagle Ford 1,361 1,893 2,105 Other Gulf Coast Rocky Mountains 1,352 2,208 2,332 Mid-Continent Northeast ,000 1, Permian West Coast Eagle Ford Other Gulf Coast Rocky Mountains Mid-Continent Northeast Source: Wood Mackenzie. Other Gulf Coast: Austin Chalk, Frio EOR, Miocene West Coast: San Joaquin Monterey Rocky Mountains: DJ Niobrara, Piceance Niobrara, Powder River Niobrara, Raton Pierre, San Juan Mancos, Williston Bakken, Williston Three Forks Mid-Continent: Anadarko North Woodford, Arkoma Fayetteville, Arkoma Woodford Northeast: Marcellus, Utica, New Albany, Antrium 12

13 EAGLE FORD CONTINUES TO OUTPERFORM EXPECTATIONS Over the past two years, Eagle Ford Production estimates have been steadily revised higher each quarter due to efficiencies such as downspacing and horizontal drilling. Eagle Ford Forecasts Through Time 13

14 AND A STEEP CHANGE FOR LIQUIDS PRODUCTION GROWTH Oil & Condensate should expect strong long term growth rates of 8% & 6% respectively. North American Liquids Production by Product 9,000 8,000 Average Daily Production (kbbl/d) 2014E 2018E 2020E Oil 3,697 5,491 5,825 Condensate 1,623 2,182 2,344 7,000 Average Daily Production (mbbl/d) 6,000 5,000 4,000 3,000 2,000 1, Oil Condensate 14

15 PETROLEUM PRODUCT IMPORTS OF THE UNITED STATES 15

16 CASE STUDY: TERMINALS (CORPUS CHRISTI) In 2011, Trafigura purchases Texas Dock and Rail (TDR). Purchase includes: o A private deepwater dock: that is 45 feet deep, and the capability of loading Suezmax and Aframax vessels. o A rail offloading site that is essential to bringing in a variety of products from all over the U.S; Union Pacific & BNSF rail line connections run alongside south of the terminal. In December 2012, Trafigura purchased 90 Acres for additional development in Corpus Christi. o Plans included 2.9 million bbl. of storage, truck off loading sites, LPG export facilities and a new office complex. o Currently facbricating a state of the art splitter with 50 kbpd design throughput capacity and supplied by pipe from Eagle Ford field stations In 2013, Texas Dock & Rail added a second deep water dock with 45 foot draft o Second dock allows to berth three medium range tankers and two inland barges at the same time. In 2013, Trafigura announced a pipeline agreement with Energy Transfer Partners for the transportations of crude oil and condensate with the capacity to transport approximately 100,000 barrels of crude oil and condensate per day 16

17 TERMINALS: KEY TAKEAWAYS The Corpus Christi project is the cheapest option in the region to ship Eagle Ford crude to an ocean going barge or higher capacity vessel The project offers entry into a compelling refining and terminal logistics venture based on one of the fastest growing shale production plays in the United States TDR/EF90 have focused infrastructure developments to achieve maximum logistics flexibility across a variety of petroleum products Emphasizing time to market allows us to provide logistics solutions faster to our customers Making further investments in a deep water dock with three berths, multiple storage tanks, improved oil pipeline access and splitter capability, we helped transform the Port of Corpus Christi into a key distribution point for Eagle Ford production to reach the market. 17

18 LATEST HEADLINES ON U.S. CRUDE EXPORT RESTRICTIONS U.S. Ruling Would Allow Shipments of Oil Overseas Exclusive: Loophole for Condensate Exports May Apply to Other U.S. Crudes sources US Oil Industry Finds Way Around Export Ban 18

19 CAN WE HAVE SOME CLARITY ON EXPORTS CRUDE VS CONDENSATE? Crude oil is defined as a mixture of hydrocarbons that existed in liquid phase in underground reservoirs and remains liquid at atmospheric pressure after passing through surface separating facilities and which has not been processed through a crude oil distillation tower. Included are reconstituted crude petroleum, and lease condensate and liquid hydrocarbons produced from tar sands, gilsonite, and oil shale. Drip gases are also included, but topped crude oil, residual oil, and other finished and unfinished oils are excluded The law has always been clear that once hydrocarbons have been passed through a distillation tower they are no longer considered crude. But the law doesn t say how much the oil must be distilled before it is no longer considered crude. It could be distilled a lot or a little. In a typical oil refinery, the atmospheric distillation column will separate the crude into 6 8 broad cuts based on the different boiling points of the different molecules in the raw crude, ranging in density from liquefied petroleum gases to heavy residual fuel oil. The distillation is fairly complete. A stabilization tower attempts only a partial distillation separating out just some of the lightest components so there may be as few as 2 cuts. The BIS rulings seem to part of a gradual process to chip away at the export ban around the edges. 19

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21 GROUP OVERVIEW Market leader in the global commodities industry with USD 120bn in net turnover Key highlights Leading position in the physical trading market, Trafigura is the world s 3 rd largest physical oil trader and 2 nd largest non ferrous metals trader Stable, resilient and profitable business model based on physical arbitrage, supported by industrial assets Extensive footprint and diversified product, supplier and customer base Strong financial performance and robust track record through the cycle Conservative risk management policies Highly experienced management team Management and employee owned Key facts Established Countries Employees Volumes Rating 103 million Metric tonnes of oil and oil products >8, million Metric tonnes of nonferrous and bulk NAIC 2( ) Designation, reaffirmed 1 Aug 2013 Integrated business model 100% Oil & Petroleum Trading Non ferrous & Bulk 70% of Group turnover 23% of Group turnover Note: All data as of FY % of Group turnover Puma Energy (Oil distribution, logistics and storage) Industrial assets 48% 100% Various Impala Group (Bulk commodity Warehousing) 7% of Group turnover Mining Group Galena Asset Management AuM: $2.0bn Trading activities Industrial activities Asset management 21

22 CONFIDENTIALITY This presentation and any ancillary documents relating to it (any part of the same and any of it together, the "presentation") was prepared by Trafigura Beheer B.V. Exclusively for the purpose of introducing the Trafigura Group. The presentation is strictly confidential and is made available to you subject to the confidentiality restrictions, acknowledgments and other provisions contained in a confidentiality agreement entered into between you and us. No part of the presentation may be disclosed by you to any third party. This presentation is the property of Trafigura Beheer B.V. This presentation must not be copied, stored (including, without limitation in electronic form), distributed or used in any other way whatsoever without the prior written consent of Trafigura Beheer B.V. No representation or warranty, express or implied, is made as to the accuracy or completeness of the presentation. Any and all liability based, in whole or in part, on the presentation, errors therein or omissions there from or for any reliance that any party may seek to place upon such information is expressly disclaimed. This presentation contains forward looking statements, estimates and projections. No representation or warranty is made or assurance is given that such statements, estimates or projections are correct or will be achieved. You should conduct your own investigation and analysis of the Trafigura Group, its business, prospects, results of operations and financial condition and should consult with their own professional advisers for advice on any investment, legal, tax or accounting issues relating thereto. Neither the receipt of this presentation by any person, nor any information contained herein constitutes, or shall be relied upon as constituting, the giving of investment, legal, tax, accounting or other advice to any such person. No obligation to provide any access to any additional information or to update or correct the presentation is accepted. 22