With oil traders seeking to match profits they make from trading oil from climate friendly projects, they are pouring hundreds of millions of dollars into such projects which include wind farms, blue hydrogen and cow manure plants.
As a result of this shift to low carbon future, the energy industry is facing growing pressure from investors, activists, financiers and governments, to find a sustainable business model.
The challenge is more acute for oil trading houses, given their already reduced profit margins due to regulatory scrutiny, increased competition, and growing industry transparency.
Trading firms, including Trafigura and Vitol have already invested into hydrogen, wind farms, solar, biofuels, EV technology, and bio-methane as potential replacements for oil. They however are yet to figure out what could become their new business model for an environmentally-friendly future.
“Nobody has figured out how to make money yet,” said Jean-Francois Lambert of consultancy Lambert Commodities. “Trading firms are now testing the waters.”
Traders make a living by exploiting niche high-margin opportunities to supply energy and commodities, doing business that other companies either fail to spot or find too risky. Such opportunities are difficult to find in the renewables sector.
“Renewable projects are reaching a scale which makes them attractive investment propositions, but there is a lot of capital chasing a limited number of projects,” said Vitol Chief Executive Russell Hardy. “Finding the right project at the right price is not easy.”
In September 2019, Natixis, a French bank, was the first to introduce internal financial penalties on deals that are not environmentally friendly.
According to Natixis, deals that have been classified as “green” would receive a reduction of up to 50% on the amount of capital the bank must retain, known as risk weighted assets, in order to get its backing. A “brown” deal, one that is not environmentally-friendly, will face an increase in risk weighting by up to 24%.
According to two sources, the European Central Bank, as well as other major European banks, are also considering similar schemes.
“Minimum standards for regular loans are getting tougher and tougher too. There’s pressure (on traders) from non-governmental organizations and banks,” said a banking source.
“Also it’s an HR question – what millennial wants a big bonus from a dirty industry?”
“The energy transition will be harder and longer than people think,” opined Torbjorn Tornqvist, CEO of Gunvor while adding, with oil demand growing though its percentage in the energy mix will fall.
“Gas must replace coal. Half the emissions would go just like that. We stepped back from coal trading for commercial reasons but now I won’t go back into it out of conviction.”