Shell and Total align trading to drive profits
Restructuring at Dutch oil giant will result in traders being laid off
OIL firms Royal Dutch Shell and Total are bringing their refining and trading operations closer together, seeking alternative ways to drive profits as oil prices fall and independent trading houses expand into their territory.
The restructuring will enable the Anglo-Dutch and French companies’ in-house traders to capture profits faster from the fluctuating prices of the different crude oil sources and products coming through their refineries. Snapping at their heels are energy brokerages Vitol and Gunvor, which have bought refining plants in Europe in the last two years in order to do the same.
Shell and Total have already started work on aligning their refining and trading operations and, as a result, both reported much better-than-expected first quarter profits
Now both are stepping up the restructuring. Shell plans to move dozens of traders from London, Dubai and Singapore to Rotterdam, where it is beefing up a trading hub just kilometres from its flagship Pernis refinery, Europe’s largest, according to company and trading sources. It also plans to lay off dozens more traders.
“We are completing staff consultation and finalising the design of the proposed change,” a Shell spokesman said. Meanwhile, Total is beefing up its Geneva trading hub so that a bigger team of dealers can optimise profits from the volatility of crude prices. It is simultaneously restructuring its refining businesses to expand its product line by converting its unprofitable La Mede plant in southern France to a biodiesel plant and upgrading its Donges refinery on the Atlantic coast to capture growing demand for low-sulphur marine gasoil following changes in EU rules.
Total is being more tight-lipped and only said that “downstream again generated excellent results due to its ongoing restructuring efforts”. A refinery closely linked to trading operations can modify its output to respond to swift changes in global demand for products – such as a boost for diesel or petrol after unplanned outages or bad weather – and lock in high profits.
Refineries that process several kinds of crude oil can leverage profits from the different prices of, say, Russian Urals or Nigerian Bonny Light, by linking trading teams into their operations.
Shell’s chief financial officer Simon Henry said Shell made an extra $1 billion last year thanks to its restructuring, and added that profits would probably increase this year.
The action took return on capital in downstream at Shell to 13.4 percent last year, 5 percentage points higher than for the overall group and up from below 10 percent several years ago. “It is not often in this industry that the downstream has had a higher return on capital than the upstream.”
Oil companies’ refining operations have become increasingly unprofitable in recent years as the Middle East and Asia have built their own refineries to meet their own demand.