If Vitol chief executive Russell Hardy’s sole focus were the company’s profit and loss account, he would have little to worry about: the world’s biggest independent oil trader is on course to post another bumper set of results that promise windfall bonuses for its top staff.
But, as Hardy completes his first full financial year in charge of the London-headquartered group, which trades almost as much oil as Saudi Arabia exports each day, the 54-year-old engineer is wrestling with two challenges that could define his tenure beyond his ability to keep the Vitol money machine humming.
First, the privately owned company has been implicated in a long-running bribery scandal in Brazil, alongside a host of other oil traders and shippers, at a time when the once-secretive world of commodity trading is already coming under increasing regulatory scrutiny.
Then, in the background, slowly chipping away at confidence across the entire oil industry, is the attempt to decarbonise the world and move away from fossil fuels, the so-called energy transition that will dominate the political agenda for the next three decades.
So, it is perhaps a surprise that Hardy’s first comment during a wide-ranging interview at the company’s office overlooking London’s Victoria station is about “kicking butts” and making sure everyone in the Vitol empire, including traders in far-flung corners of the world, are performing at their full potential.
“For the company to do well, we have to hire the best people and have the right mix of players on the field,” Hardy said.
“[But] you have to manage people aggressively internally to get the most out of them. It gets a little bit more difficult every year because the company is a little bit bigger and being able to tell what is going on at the toes is more difficult.”
Send a signal
Hardy wants to send a signal that the hard-nosed culture at the company, which is owned by roughly 350 partners, is not in any danger of being blunted despite the group’s driving force, Ian Taylor, stepping down in 2018 to become chairman.
He said Vitol’s strong performance in 2019 owed much to a physical oil market where supply was tighter than futures prices might have suggested, with Brent – the international benchmark – bouncing around $60 (CHF58) a barrel for much of the year.
While financial markets were bearish on crude because of concerns about slowing demand growth and strong supply from US shale fields, in the physical world refiners were being forced to pay up to secure barrels, handing a degree of pricing power to trading houses, according to Hardy.
The Financial Times reported in September that Vitol had made more than $1 billion in net income in the first half of the year, and Hardy gave little indication that performance had weakened since June.
“Physical margins have generally been good this year and the reason . . . is because crude oil has been constrained, it has not been oversupplied,” Hardy said, pointing out that rivals Trafigura and Glencore had also reported strong oil trading results.
Gas trading was also a success as the company bet against prices in Europe, which declined sharply as supplies of liquefied natural gas boomed. It is betting on more volatility in energy markets in 2020, predicting a marked slowdown in the pace of growth in the US shale sector.
But the bigger concern will be the outcome of the investigation into alleged corruption and bribery in Brazil, which has seen the commodity trading industry pulled into the sprawling “Car Wash” probe. It was named Car Wash after the small businesses, including petrol stations and car washes, used for money laundering.
Brazilian prosecutors allege that Vitol and Trafigura paid bribes via middlemen to employees of state oil company Petrobras to obtain fuel contracts on favourable terms.
Trafigura said any suggestion that the company’s current management knew that its payments would be used to make improper payments to employees of Petrobras was not correct. It said the company [Trafigura] had a zero-tolerance policy on bribery and corruption.
The case comes at a difficult moment for the industry, which says it has worked hard to become more transparent.
Glencore, the world’s most powerful commodities trader, is under investigation by the US Department of Justice and the UK’s Serious Fraud Office.
Hardy is tight-lipped on how the investigation is evolving – both Vitol and Trafigura’s offices in Geneva were raided by Swiss authorities last month – but indicated he expects it will “come to a head” next year. Vitol has consistently said it has “zero tolerance” for bribery or corruption.
“We can’t do anything about it. We just have to roll with the punches for the time being and let the process take its course,” Hardy said.
He said the big international banks that help finance Vitol’s trading operations were being “understanding” of the situation, and tried to draw a distinction between how the company operates today and how it may have done business in the early 2000s.
“You know the world is a different place and Vitol is a different company today. So one would hope our stakeholders would understand that. Some of the allegations go back as far as 2004. Clearly life was very different.”
If Hardy seems relatively unshaken by the Brazil probe, he conceded that he was spending an increasing amount of his time worrying about the company’s place in a global environment where efforts to tackle climate change are intensifying.
While the company only produces minimal amounts of crude, its role as one of the biggest traders, alongside running refinery and storage operations, leaves it exposed in a world where Vitol itself predicts oil demand could peak within 15 years.
Part of its preparations involve trying to bolster its gas, power and renewables businesses, which insiders say make up about 15% of its earnings.
“We’d like that whole basket of stuff to do more . . . [to] use more of the company’s capital to make a return because today we are not using much capital in that area,” Hardy said.
He is doubtful it will ever replace oil as the Vitol’s machine’s main cash spinner, but that does not mean they are not going to try.
As if to make the point, as the interview ends, Hardy greets the founder of a plastics-to-diesel company. “We’re going to turn it into the biggest plastic recycler in the world.”
Copyright The Financial Times Limited 2020