Clive Christison, Director & CEO, Integrated Supply & Trading, Eastern Hemisphere, BP, Singapore
Director & CEO of IST, Eastern Hemisphere, Clive Christison identifies the impact of the Macondo incident on the company’s IST operations and pinpoints factors as to why Singapore, despite rising competition, will remain a critical player in the regional downstream industry.
BP has had an evolving presence in Singapore since 1964. With primary trading hubs in London, Chicago, Houston, Calgary and Singapore, what is the relative importance of BP Singapore to the Group’s global IST operations?
Having moved away from being a physical refining company in Singapore into a knowledge and trading hub, the history of the local office has been one of growth and is as such of great importance to the group’s regional and global operations. We began with some five employees in the early days of the trading organization but have now grown to include over 400.
From a group wide perspective, the importance that Singapore plays internally and externally for BP is incredibly high because of the global nature of energy trading. The markets today are all highly interconnected and to trade in any one given location, one must understand the global dynamics of what is taking place. The ability to share information and stay connected to the world view is critical across all traded commodities. We have, for this reason, established our trading process to reflect a global perspective for all commodities. This allows us to share information quickly and gain insight into events across the world that affects prices, spreads and ultimately supply and demand.
Situated in the middle of Asia, the Singapore office caters to the entire region as well as the Middle East. This area has been the fastest growing demand center for products and crude and also the fastest growing production area in terms of refining capacity. These developments have changed the way markets in the region impact global demand. They have grown to such an extent that they are now more important than impacts from the West. Our remit is therefore to capture as much of that growth as possible and leverage the global trading network we have to trade wisely in local and international markets.
You have been CEO and Director of BP integrated supply and trading (IST) for the Eastern Hemisphere since 2008 and steered the unit through the global financial crisis and the Macondo incident. How did these events impact your operations and what role did you have in supporting the global company’s operations?
In some regards, the primary roles of our activities here are focused around ensuring BP’s operations are consistently optimized. From the Singapore offices, we effectively monetize the oil and gas that BP produces from across the eastern hemisphere including Asia, the Middle East and Australia. In addition to this, we are responsible for ensuring BP’s manufacturing assets are supplied with the optimal inputs they require including crude oil and feedstock. We also provide raw materials and products to many markets so that our customers reliably obtain the supplies they need. Moreover, we also provide a similar service to third parties such as oil companies, refineries, power plants and airline companies. To summarize, with the information gained through our global trading activities we can also create entrepreneurial trading income and manage BP’s forex requirements.
Because IST touches 85% of our business units and acts as the link between the E&P and the Refining and marketing sectors, we have a significant responsibility in terms of managing the organizations cash flows. During the financial crisis, the markets demonstrated violent responses from a trading perspective as everyone was trying to understand what was happening at the time. Of course, the commodity market was no different from the equity market. In fact, the commodities market saw a very deep contango structure across all the products which encouraged us to hold stock for all materials. With all the uncertainty in the world markets, there was a big focus on liquidity; ambiguity over who would still be on the markets requiring products and who still could maintain a healthy credit line to meet their obligations. Hence, our role at that time primarily revolved around the management of our clients’ financial integrity and credit lines to ensure our role of monetization ultimately took place while minimizing the risk of default.
On the other hand, the Macondo incident understandably had a dramatic impact on BP’s share price leading to significant challenges on its balance sheet. Given the flexibility inherent with having a trading organization, we were able to call in on our debtors while carefully managing the physical working capital and cash of the group to ensure there was enough liquidity in the market. Beyond that, we organized a successful physical response in the US to ensure that supplies continued to flow to our business and customers there. In the Asian context, although our regional operations here were to some degree more sheltered from the effects of the incident in the US, we also dedicated significant efforts to responding to our customers helping them understand what was truly happening and communicating our operational continuity and capacity to maintain our commitments to our customers.
One result of the Macondo incident was the group’s review of its financial framework, looking at how much debt versus how much cash we maintained as a group. Since we now hold more cash on our balance sheets than we have historically had, BP’s trading business now has access to greater resources which it utilizes as working capital or financing for investment through debt to generate returns for the group.
In light of the market trends as we mentioned earlier, and increasing competition from countries like China, to what extent is Singapore’s positioning as a world leading oil trading and supply hub being challenged and what can or should it do it stay ahead?
Singapore remains a critical player in the downstream industry, perhaps even increasingly so in the future. The refining infrastructure in Singapore is well established and continues to develop and expand. Some of the island-states’ largest investors in the downstream industry, including Shell and ExxonMobil, with significant assets here have taken into account demand trends as well as quality requirements in a bid to produce higher quality, low-sulfur products, for instance.
Indeed, the increase in downstream competition from China, Japan and particularly the Middle East, among others, has been fuelled by the increase in regional demand. This may have a downward pressure on refining margins as increasing levels of production become operational.
For a refining industry to be successful, it must have a highly integrated set of equipment that can run on a flexible range of crude diets to ensure it is able to extract the best margins as they are available. Those with less sophisticated refineries are finding it more difficult to cope as a result of increased international refining capacities coupled with a tougher market in the West causing depressed margins. Moreover, if these producers lack the ability to source cheap crude, or produce a high quality product, their margin structures will weaken and they will face economic difficulties.
By contrast, I believe Singapore will remain a leading downstream location due to its well-integrated and sophisticated petrochemical complexes. It also boasts a large dedicated infrastructure built around the petrochemical industry with, for instance, interconnected storage facilities and fantastic logistical support through its world class harbor. Moreover, Singapore is situated in the middle of a significant demand center and offers a talent pool that has granted the industry access to a highly educated and productive workforce. Furthermore, there is also great infrastructure from the government perspective that is highly supportive of the wider industry as a whole. Be it in the trading or refining business, the government in Singapore is proactively pro-business and takes significant effort to understand the requirements of business. This has led to a hub of industry players together forming a sum greater than their parts creating a very strong industry. From an oil industry perspective, this is what made Singapore so successful and I am confident it will remain a big part of Singapore’s future.
At the end of the day, one of the challenges Singapore faces as of now are attempts by other hubs to mimic infrastructure and support systems here. However, the city-state has a clear advantage of years of investments in its physical asset created through honing the specific regulatory policies and cultivating human capital needed to create a synergistic eco-system. By any measure, these attributes are all very difficult to recreate.
With international financial institutions such as JP Morgan, for instance, contemplating the disposal of their energy trading desks, we are seeing a trend towards the ‘de-financialization’ of energy trading away from banks back to oil companies. How will this general shift of energy trading back to integrated energy companies impact your operations?
There are two sides to this. Some on the energy company’s side might consider this a positive development as a result of fewer competitors in the market, but we think otherwise. Competition effectively drives liquidity and transparency, which in turn creates trade opportunities.
In the past, we did see banks push into the wider commodities space in a bid to diversify their activities and leverage the strong client base they enjoy. However, the change in recent regulatory environments is placing greater constraints on their business, particularly with regards to capitalization requirements of their balance sheet. This is leading banks to strategically reconsider where their core activities lie and whether commodities’ trading is a part of that. In addition to this, the heavy balance sheet requirements needed to support a trading organization are also deterring banks from the energy commodities business. Hence, we are seeing a number of banks either exit or reduce their exposure to commodities trading.
Early in February 2012 the Monetary Authority of Singapore (MAS) and International Enterprise (IE) proposed the transfer of regulatory oversight of OTC commodity derivatives under the Commodities Trading Act (CTA) to the Securities and Futures Act (SFA) expected to come into play by late 2014. Is this a move in the right direction given the MAS’s lack of experience in the field?
The MAS has adopted a very open approach in the drafting of this proposal. We have been fortunate enough to be in regular discussion with the MAS to understand their motivations and what their priorities are from a governmental and regulatory perspective. Given the importance of the trading industry in Singapore, the authorities have been meticulous in their planning and transparent in their decision making process and have produced a series of white papers on the subject to which, in some cases, we have contributed. We have also had the chance to share our insight with regard to how the commodity markets operate, particularly in the energy arena. In terms of gaining practical user insight, I believe this has helped the MAS find the balance between increased transparency in the oversight and regulation of markets, whilst ensuring those creating policies understand the implications of that transparency, how the market operates, where their focus should be directed, as well as managing trends in international markets and the implications that has in terms of the global market.
Given BP’s significant and broad-based operations in Singapore and its role as a regional knowledge hub and a mega data center for global IT operations, what role is the company playing fortifying Singapore’s positioning as a regional multi-disciplinary hub?
In part, Singapore is undoubtedly benefiting from our growth as an integrated supply and trade organization. In other words, our growth supports Singapore’s wider infrastructure development through employment, investment and taxation.
With regards to the trading sector, our physical growth has contributed to Singapore’s positioning as a true trading hub. Furthermore, this is supported by our local participation in BP’s global trading program which encourages talent development in Singapore.
Outside of the trading organization, Singapore is a hub for BP Shipping which manages the marine and shipping risks for the Group on a regional level. In addition to this, we have also relocated the manning and service activities for our global fleet to Singapore which was previously situated in Europe. This represented a significant investment for BP in terms of infrastructure and physical operations. Similarly, we also relocated our regional headquarters for our lubricants business, Castrol, from India to Singapore. This brought in our regional leadership here while expanding our local lubricant manufacturing facilities. Singapore is therefore the center from which we manage our regional Castrol business for the thirty countries we serve and is one of BP’s fastest growing brands bringing in more talent and financial growth to Singapore .
On the other hand, we have also brought two mega data centers to Singapore due to the availability of quality IT professionals here. Singapore’s strong IT infrastructure also gives us the confidence to have the data center here providing backup for our global network. Moreover, our location also allows us to operate our global IT network around the clock.
Furthermore, we have also positioned some of our functional teams to Singapore including, for instance, our treasury team which was previously in Hong Kong. In part, this is to support the growth of the businesses located here, but also because of the liquidity in the local banking industry. Another benefit of the time zone differences is that while Singapore is awake, the rest of the world is asleep. This has allowed us to assess and streamline how we provide a global service from a range of our functions.
Reflecting our commitment to Singapore as a knowledge hub, we are in the process of establishing a Chief Technology Office (CTO). BP currently operates a CTO in the US, but we are seeing that a number of emerging technologies are coming from Asia and we believe that Singapore is the ideal place from which we can capture that. The scope of the CTO will include a wide range of topics from IT to drilling rig and refining technologies, among others.
It has been announced that there will soon be a leadership swap between yourself and your America’s counterpart, Mr. Andy Milnes. What does this move tell us about BP’s strategy going forward?
It is not so often that we are able to carry out job swaps and this occasion provides for a unique opportunity. From an internal perspective, this ensures a level of stability at the leadership level. This again reflects the globalization of our global business model which requires the understanding of each regional market. What happens in Asia and the US in turn has an effect on the other market and applies to both businesses.
Since our physical footprint here in Singapore is lighter than that of the US, a large part of our focus is here is on third party and entrepreneurial trading; which I intend to apply to the Americas as we look towards new geographies such as Latin and South America. In turn, Mr. Milnes will bring a depth of understanding from the US and crude markets which will enable the Asian offices to respond to evolving market dynamics, particularly with respect to shale developments in the US and their global impacts. In addition to this, his vast experience in the trading industry will enable the Singapore business to take the next step in its development. Given the global nature of the business, we will both be able to bring continuity to our global customers – for instance, our Asian based customers with interests in the US and vice versa.
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