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Hyundai to Trafigura Shaking Up Oil Industry as Lines Blur

Sharon Cho

(Bloomberg) -- Hyundai Oilbank Co.’s recent opening of a small Houston office may have been modest in scale, but it was very much a sign of the times.

The refiner became the second South Korean processor after SK Innovation Co. to establish an American presence to potentially buy shale oil directly and charter its own vessels. The move -- aimed at cutting costs by reducing reliance on traders and cargo brokers -- is also emblematic of a wider trend.

As well as refiners, big energy traders and national oil companies are expanding beyond their traditional roles. Trafigura Group is planning to build a floating jetty off Texas to allow it to load oil onto large tankers, while industry behemoth Saudi Aramco is trading more non-Saudi crude and refined fuels.

“The lines are blurring,” said Vandana Hari, founder of Singapore-based energy industry consultancy Vanda Insights. “Companies, whether they’re the national oil companies, international oil companies or refiners, are increasingly trying to sustain in the long term by streamlining and integrating.”

These changes are happening against a backdrop of improving technology, which is making pricing and supply more efficient and eroding the advantage of having a network of contacts. That’s driving greater cost-efficiency across the industry as a whole, resulting in bigger companies seeking to chop out small-scale traders, agents and cargo brokers.

See also: Commodity Traders Lament World Where Everybody Knows Everything

“Pure oil traders, the middlemen, are getting squeezed,” Hari said. As the larger firms become more integrated, there won’t be room for smaller, niche players, she said.

While Hyundai Oilbank currently only has one staff member at its Houston office, it’s following in the footsteps of SK Innovation. Korea’s largest refiner already employs around 100 people in the U.S. city, said company spokeswoman Kim Woo Kyung. It has its own trading team and has been exploring for and producing shale oil in Oklahoma and Texas since 2014.

Aramco has started buying and selling non-Saudi oil over the last couple of years, following other national oil companies in Oman, Iraq and elsewhere in taking a greater interest in trading crude and not just supplying it.

“Industry players are increasingly looking to increase their share of the total value pool captured,” said Tushar Tarun Bansal, a trading and downstream expert at McKinsey & Co. in Singapore. They’re doing it in a variety of ways including vertical integration, using advanced analytics in trading and opening offshore offices, he said.

In addition to the jetty it’s building off Corpus Christi in Texas, Trafigura already owns tanks at the port. The world’s second-biggest independent oil trader has also signed a long-term deal to transfer crude from the Permian Basin to the coast via the new Cactus II pipeline system, making it an integrated company in the region.

“Oil traders realized the benefits of owning midstream infrastructure -- pipelines, storage tanks, ports, terminals and ships -- replacing the expenses of tank leases, pipeline tariffs and vessel charters,” said John Driscoll, chief strategist at JTD Energy Services Pte and a former oil trader.

Outside the U.S., Trafigura also has stakes in a refinery, fuel terminals and service stations in Papua New Guinea. Japanese trader Petro-Diamond, through its stake in a private equity firm, also owns part of a refinery in Hawaii, while Vitol Group has retail gas stations in Africa and refineries in Germany and Australia.

“Supply chain players -- national oil companies, producers and refiners -- have become more savvy and resourceful,” Driscoll said. It’s primarily about the larger vertically-integrated companies optimizing their supply chains and garnering better returns on their assets, he said.

(Adds analyst comment in 11th paragraph.)

--With assistance from Dan Murtaugh.

To contact the reporter on this story: Sharon Cho in Singapore at ccho28@bloomberg.net

To contact the editors responsible for this story: Serene Cheong at scheong20@bloomberg.net, Andrew Janes, Ben Sharples

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