We may live in the 21st century, but the system thatpowers oil trading and shipping in fact, almost all commodity trading stillclings on to its 18th century roots. Today, to ship a cargo of say,Brent crude, from buyer to seller (and possibly a trader in between), thebarrel gets loaded on the boat with a bill of landing stamped by the shipscaptain. That then gets distributed to customs, surveyors,agents, brokers and other officials to be stamped and processed so the cargocan leave on time. Letters of indemnity are issued just in case the documentsarent processed in time, and they often arent. Once the ship docks and thecargos get offloaded, another round of paperwork begins; to say nothing of the reamsof additional paper that await in terminals, depots and distribution centres.Digitisation has helped offload some of the paperwork to computers, but it isstill an archaic process. And one that costs more money than it should.
Swiss commodity trader Mercuria believes that the process could beimproved. Which is why last week, it announced that it was working togetherwith banks, ING and Societe Generale to conduct the first large oil trade basedon a technology on the digital cutting edge, blockchains. Though smallerexperiments have been conducted, this will be the first time a major crude sale a cargo of African crude to ChemChina (which owns a stake in Mercuria) willuse blockchains.
What are blockchains? It is the technology that powers that virtualcurrency bitcoins, hailed as a glimpse of an all-digital future of money.Bitcoins can be used to purchase goods, passing hands with no more than a fewclicks on a computer, eliminating the need for cash and paper. Its gettingmore common than you think, with someprogressive stores in London and New York already accepting bitcoins as paymentfor coffee, meals and products. Blockchains are the paper trail that shadowevery bitcoin. Simply put, a blockchain is a database of records linked toevery bitcoin; a ledger of all transactions and ownerships that have comebefore, with an encrypted timestamp. If you acquire a bitcoin, the blockchainwill be updated to identify you as the new legal owner. Pass that bitcoin on,and the blockchain updates again to reflect that. It is a secure system,designed to be resisted to any modification.
At least, thats the future that Mercuria envisions, which is why itis testing the system out on a shipment to a shareholder, as an experiment toprove its viability. If successful, it could kickstart a digitisation driveacross the trading industry, with Mercuria estimating cost savings of up to30%. Financial institutions no strangers to archaic procedures themselves are preparing for such a future. But both Mercuria and the banks it is dealingwith agree that the system has to reach critical mass, which is at least 5 -10years away. If it ever does, remember that it happened in January 2017 first.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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GEO ExPro Vol. 16, No. 1 was published on 4th March 2019 bringing light to the latest science and technology activity in the global geoscience community within the oil, gas and energy sector.
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell