* Disclosure levels at oil majors lags those of secretive
* Risk appetite bigger at top Wall Street banks
* Pressure for stricter oversight rises both in US, EU
By Dmitry Zhdannikov and Claire Milhench
LONDON, May 22 Europe's energy price
manipulation probe has turned regulatory attention to secretive
trading units at oil companies with huge turnover and
millionaire staff with risk appetite higher than at Wall
Street's biggest banks.
Regulators have scrutinised banks, trading houses and
commodities markets more closely following the Libor benchmark
rigging scandal but trading desks at oil majors have largely
Although banks and trading houses have expanded rapidly in
energy over the past decades, oil companies still often dwarf
them in size, geographical reach, profits and sometimes the
magnitude of scandals surrounding their operations.
An EU investigation into the suspected manipulation of the
price of crude oil, refined products and ethanol has thrown them
into the spotlight.
"Political pressure for regulatory action and stricter
oversight of both traders and price reporting agencies will ramp
up," said Roderick Bruce, energy analyst at IHS think-tank.
EU investigators raided offices of BP, Shell
and Statoil, trading house Argos Energy and pricing
agency Platts last week as part of the case. It was the biggest
cross-border action by the regulators since the Libor scandal.
Despite massive disclosure obligations by publicly-listed
oil firms, simple metrics such as revenue and profit at their
trading divisions are not public.
There is also pressure from shareholders for the companies
to provide more transparency.
"Obviously you can't talk about the size of the positions
that the companies are taking, but in terms of the impact that
trading has on profitability, it should be evident because that
helps to explain the underlying profitability of the company,"
said Charles Whall, who helps co-manage $1.08 billion at
Investec Global Energy Fund, including shares in Shell.
The world's biggest trading houses including Glencore
, Vitol, Gunvor, Trafigura and Mercuria, long perceived
as the most secretive firms in oil trading, have all started
releasing detailed financial data in recent years to tap bond
and equity markets.
By contrast, oil majors like BP, Shell, Statoil, Total
and Eni disclose very little.
For example, BP, one of the biggest and most powerful
trading desk in the industry, last disclosed figures for trading
in 2005 when it earned $2.97 billion, or over a tenth of the
group's overall net profit.
Since 2005, BP has only disclosed whether trading had
"stronger" or "weaker" contributions in a given quarter.
Disclosure levels at Shell, Total, Eni are similar.
"Our trading activities are accounted for under
International Financial Reporting Standards. The disclosures we
provide in the annual financial statements are also determined
by those standards," a BP spokesman said.
He added that when trading has a notable impact on quarterly
performance the firm would always spell this out. Shell, Eni and
Total declined to comment.
Insiders say BP's annual trading profits have fluctuated
since 2005 between $1-$3 billion compared to $1.7-$2.3 billion
at the world's largest oil trading house Vitol.
Oil majors say trading facilitates cooperation between their
producing, refining and distribution units.
"It is not speculative and it doesn't take large positions
or exposures," Shell's chief financial officer Simon Henry told
a shareholders meeting this week while saying the company often
makes more money in volatile trading conditions.
This is not how Investec's Whall sees trading operations.
"We invest in these companies because this is one of the
ways they make money. They have a physical position and run a
speculative book on the back of it. I'm quite comfortable with
that if it's well controlled," he said.
One metric shows that risk appetite at oil majors' trading
divisions is large.
Value-at-risk, which measures how much a company is prepared
to lose in one day on trading, averaged $34 million at BP in
2012, down from as high as $45 million in 2009. It was stable in
the past few years at around $30 million at Shell.
Only Glencore, the world's top trader, has comparable
figures at $40 million with Gunvor's VaR averaging only $12
The biggest Wall Street banks active in commodities trading
have almost halved their VaR levels to $15-$20 million a day in
recent years as they cut down on proprietary trading - trading
with a firm's own money to make money for itself rather than for
a customer. It can lead to more risky trading and more volatile
"I find it quite extraordinary that during a global
clampdown on proprietary trading, especially at banks,
publicly-listed oil majors are still allowed to effectively
maintain large prop operations," an industry veteran, who has
worked at both banks and majors, said.
PRESSURE ON BOTH CONTINENTS
The United States has stricter oversight of financial and
commodities markets and has had several successful high-profile
prosecutions of oil companies for market manipulation.
In 2007, BP paid a record $303 million in a settlement with
U.S. authorities for manipulating propane prices. "BP engaged in
a massive manipulation..." U.S. Commodities Futures Trading
Commission (CFTC) said at the time.
After that, the U.S. Department of Justice installed a
monitor, who oversaw BP's trading activities for several years.
Insiders say BP has made significant changes to its trading
division since then, including by cutting back on remuneration
to reduce risk taking.
Other oil majors as well as traders such as Arcadia have
also been charged by U.S. officials with market manipulation
over the past decades.
The European Union has tightened oversight of the
commodities market to be closer to rules in the United States.
The EU pricing probe, which a key U.S. senator has urged the
U.S. Justice Department to join, may signal that the regulator
is getting more aggressive.