Shell, Total Align Trading, Refining to Drive Profits

Shell, Total restructure to combat falling oil prices.

Top oil firms Royal Dutch Shell (RYDAF) 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.

"As traders grew assets in downstream, majors realised there was a lot of money to be made on optimisation. So to a certain extent, trading houses encouraged us to change," said a high level source from one of the oil firms, speaking on condition of anonymity because he was not authorised to speak publicly on the matter.

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 miles from its flagship Pernis refinery, Europe's largest, according to company and trading sources. It also plans to lay off dozens more traders as part of the move to a cheaper cost-base.

"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, company sources told Reuters.

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. [ID: nL5N0XD14O]

Total is being more tight lipped about the reforms and only said this week 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 gasoline 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.

FAST RESULTS

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 likely 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," said Henry.

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.

Total's chief executive Patrick Pouyanne was praised last year for merging refining and petrochemical businesses after the group reached its target of return on capital earlier than forecast - 15 percent in 2014, up from 9 percent in 2013.

Not all oil majors have followed Shell and Total's steps. While BP has a large global trading division, the world's biggest listed oil company ExxonMobil - which has a much small global refining business - uses its trading division mostly to buy in supply for its own refineries.
 

By Dmitry Zhdannikov and Ron Bousso