BP bets on energy trading to fund strategy shift after bumper year

BP's trading arm made nearly $4 billion in 2020, according to a copy of an internal BP presentation seen by Reuters, almost equalling the record trading profit in 2019 despite the collapse in oil demand caused by the pandemic.

Trading revenue for majors such as BP and rival Royal Dutch/Shell shielded them from the full impact of the worst recession to hit the modern energy industry, helping finance their shift towards a new business model in a lower carbon economy.

Even with near record trading earnings, BP posted a $20.3 billion loss with writedowns in 2020 and a $5.7 billion loss without writedowns, plunging into the red for the first time in a decade.

BP, which does not publicly disclose the revenue from its trading arm, would not confirm the content of the presentation seen by Reuters and declined to comment for this article.

BP and Shell are banking on cash flow from trading to support them through their transition and to generate profit as they focus on renewable and power markets and become less dependent on fossil fuels.

BP has formally promised to cut oil and gas output, while Shell says its oil production has peaked. Both say they are expanding trading and they still make billions of dollars a year moving oil and gas around the world.

BP plans to expand power and renewables trading but many of those markets are highly regulated and unlikely to deliver the same profit margins as oil and gas.

One of the biggest trading plays in 2020 was to store oil during the downturn, buying it at low prices and selling it later when prices recovered.

It was a relatively simple game with minimal risk because the oil futures market allowed traders with access to large storage to lock in future profits through hedging.

BP made around $1.7 billion on this strategy alone in the second quarter of 2020, according to the presentation.

It made lower but steady earnings in the first and third quarter, while it generated only about $250 million in the fourth quarter of 2020 after betting on weak gas prices that soared instead, according to the presentation.

RARE DISCLOSURE

BP's 2020 result showed the big impact oil and gas trading can have on performance.

BP Chief Financial Officer Murray Auchincloss told analysts in August on a second quarter results call that there had been an "exceptionally strong contribution from oil trading".

Last year, was one of the most volatile for oil, which is generally good for trading. Volatility is likely to become a more prominent feature of what is an uneven transition to renewable energy worldwide.

Trading is likely to provide a financial buffer before investments in renewables start to pay off.

"We think the power of integration from our trading organisation is awfully good," Auchincloss said in August, adding BP could secure returns on investment in "double digits" with integrated trading of oil, power, natural gas and solar energy.

Oil majors typically do not disclose any figures for their trading divisions' performances and figures emerge once every few years through internal reports.

Without contributions from trading last year, BP's results would have looked bleaker.

BP had a replacement cost net loss of $18.1 billion in 2020, down from a $3.5 billion profit in 2019, because of massive writedown due to low oil prices.

Without the writedowns, underlying replacement cost loss before tax was $5.7 billion, of which BP's production division generated a $5 billion loss and refining a $3.1 billion profit.

In the BP structure, oil trading belongs to the refining division while gas trading sits under production.

The internal presentation seen by Reuters combined results of oil and gas trading under one umbrella as integrated supply and trading (IST).

Last year, IST made close to $4 billion in replacement cost operating profit (RCOP), a near record amount compared to slightly over $4 billion in 2019, according to a presentation seen by Reuters.

RCOP excludes tax and changes in value of inventories and is the closest metric to the underlying replacement cost pre-tax result. BP declined to provide company-wide RCOP metrics.