National oil companies venture into trading business

October 9, 2024, 12:18 PM

National oil companies in the Middle East are developing their trading businesses in pursuit of new sources of income — Middle Eastern oil companies see an opportunity to capture more value and add billions to their profits

Multi-billion profits possible
Dubai offices are a focus
OQ trades 30m tonnes a year

Traditionally conservative national oil companies (NOCs) in the Middle East are developing their trading businesses in pursuit of new sources of income and to eat into the bumper profits of commodities houses.

OQ of Oman, Saudi Aramco, UAE’s Adnoc and QatarEnergies have successfully developed their refined products and trading over the last decade to catch a part of the market dominated by independent traders such as Gunvor, Trafigura and Vitol.

Increased volatility has made trading very lucrative; the largest commodity companies have raked in astonishing profits in recent years.

The four main privately-owned energy traders – Gunvor Group, Mercuria, Vitol, and Trafigura Group – have made combined net profits of more than $50 billion in the past two years, according to Bloomberg.

Strategic move

To gain better access to markets in Europe, Asia, and the US, regional NOCs are establishing their trading presence in the UAE and are expanding globally.

OQ Trading, for example, has established offices in Dubai, Houston, Rotterdam, Shanghai and Singapore to handle about 30 million tonnes of energy products annually.

Aramco Trading launched Aramco Trading Americas, with offices in Houston, Texas, after acquiring Motiva Trading, one of the world’s leading commodity companies. The move gives access to “the world’s robust hydrocarbon system,” according to Aramco.

Since 2018, the UAE’s Adnoc has been developing trading operations for crude oil and refined products. The company has established Adnoc Trading and Adnoc Global Trading, a joint venture with Austria’s OMV and Eni of Italy. Adnoc also plans international expansion, including setting up a US trading desk.

QatarEnergy is similarly enhancing its trading, focusing on liquefied natural gas as a cornerstone of its strategy.

While Oman was among the earliest to set up a trading arm, Kuwait Petroleum Corporation (KPC) and Bapco Energies of Bahrain are the last two regional companies to follow the success of their peers.

Shaikh Ebrahim Al Khalifa, Bapco Energies’ executive vice president for business development, told an energy conference in Fujairah last week that starting a trading business was a strategic decision to capture margin incremental value.

Bapco Energies entered into a joint venture with the French major TotalEnergies last July to trade oil products from its refinery in Sitra.

The nearly 90-year-old refinery has been going through an upgrade and expansion process.

KPC plans to begin trading operations in the Dubai International Financial Centre by early next year. “It is all about the value,” said Emad Al Kandari, international marketing and contracts official at KPC.

“We are the last regional company to launch our trading arm: KPC Trading will be responsible for our share of Duqm refinery and will be trading other refined products from Kuwait and outside,” Faisal Al Haddad, KPC’s head of market research, told AGBI on the sidelines of the conference.

Duqm is Kuwait’s joint-venture refinery with Oman’s state oil company.

KPC has also increased sales of fuel and diesel to Europe following the expansion of its Al Zour refinery, Al Kandari said.

Value chain

Middle East producers have developed their refining capacities, as low extraction costs enable them to beat competition outside the region.

However, NOCs are expanding in challenging times when demand for oil and diesel is subdued and refinery margins are falling.

Analysts believe that NOCs are venturing into the trading business to “hedge against the prospect of peak demand”.

“The global oil market is in transition; when you get to the peak demand and a declining, shrinking market, you have to think more commercially to be more competitive,” said Iman Nasseri, managing director of Facts Global Energy.

Andrew Laven, managing director at energy consulting company E-Cons, said that in addition to securing demand for their products, NOCs want to control the entire value chain. “They want to determine how they sell their barrels,” he said.

“If you look at Adnoc or Aramco, their first priority is securing the demand; then optimisation is second.”

“The last barrel of petroleum products will be produced in this region. And who’s going to trade them? Partly it’s the evolution of what you see,” Laven concluded.