How post-trade digitalisation is modernising commodity trading
Tuesday, November 9, 2021
From the drones that monitor infrastructure to the artificial intelligence used to assess the risks of each individual asset, right the way through to the energy trade and risk management (ETRM) systems that manage positions between traders, retail outlets, vendors and partners, the day-to-day operation of the oil and gas industry is a high-tech affair. However, once the trade is agreed, that’s where it ends.
Despite all of the digital advances in the industry, the energy commodities post-trade process is antiquated. With participants along the chain having to grapple with vast paper trails spanning multiple separate systems to execute, authenticate, and handle each trade, the process is time-consuming and error prone.
Today, as a confluence of disruptive factors converge on the industry, digitalisation has become an imperative, and ecosystems that collaborate to deliver more value are redefining the space.
From a slow start…
The sheer size and complexity of the industry has long been a barrier to modernisation. Traders and brokers need to be able to confirm trades, inspectors need reliable information and instructions, ship owners need confirmation of bookings, and terminals and pipelines need visibility over capacity, and all of these parties need to be able to check and resolve discrepancies. For the banks financing these transactions, as many as 36 different original documents plus 240 copies from 27 different parties are required.
But in an industry resistant to change – BCG’s annual Digital Acceleration Index (DAI) study consistently ranks the energy commodities sector as a digitisation laggard – progress on ushering in a new digital era has been slow.
… to the dawn of a new age
The Covid-19 crisis and ensuing global recession have exacerbated existing challenges for the sector, which is now under greater pressure than ever before to reduce costs and increase efficiencies. And with estimates showing that the digitalisation of post-trade processes could achieve savings of up to 40% across operations, accounting, settlements and IT, the industry can no longer afford to stand still.
VAKT, a platform for commodity post-trade management, is working to make these savings a reality. Launched in 2018 by some of the world’s leading energy majors, it creates a digital link between all parties in the ecosystem, enabling them to contribute data from trade entry to final settlement, doing away with reconciliation and paper-based processes.
Built using blockchain technology, VAKT provides efficiency savings by replacing unwieldy email and fax chains with digital communication, and also eliminates the potential for fraud by providing a single source of truth for buyers and sellers that is safeguarded with an immutable, distributed audit trail.
This last point has become increasingly important in the wake of recent fraud cases in the wider commodity space. Made possible by opaque paper-based processes and a lack of digital confirmation facilities, the scandals have damaged trust and led financial institutions to re-evaluate their offering, with some leaving the sector entirely.
For many smaller traders in particular, this has meant fewer options for accessing finance in an already squeezed market. Several initiatives are underway to address this. For example, banks in commodity trade hub Singapore, along with Enterprise Singapore, an innovation-focused government agency, have developed a code of practice to “encourage greater transparency and trust between trading firms and their lenders”, with recommendations including that traders provide banks with information on “the end-to-end process and trade cycle”, including visibility over transactions, the goods being traded and any receivables due.
For the large multinational companies already using VAKT – including BP, Shell, Saudi Aramco, Chevron, Total, Reliance Industries, Gunvor, Mercuria and Koch – the technology enables them to reduce costs through fraud reduction and streamlined processes. However, it is not only large firms who stand to benefit. By helping the sector regain trust among financiers as well as lowering the unit cost of physical transactions, VAKT can help create opportunities for smaller players, too.
The power of data to drive change
Cutting costs and increasing access to finance are not the only issues that are top of mind for the industry at present. In the wake of COP26, companies within the commodities sector are under more pressure than ever from their clients, regulators, and their own environmental, social and governance (ESG) policies to reduce their carbon footprint – and this means getting a handle on scope three emissions.
Scope three emissions are generated indirectly across the entire value chain of creating an end product, beginning with sourcing the raw materials, and continuing through manufacturing, transporting, and using the product.
By moving away from unstructured communications to machine-readable data, the industry has the opportunity to gain insights into ESG performance. For example, bringing together information on the Incoterms of a particular transaction along with tanker data can enable the accurate allocation of the carbon cost of shipping. With end-to-end digitalisation, the environmental impact of commodities trading can be measured, company by company, allowing the industry to monitor and lower its emissions footprint.
Reaching the tipping point
The successful digitalisation of the commodities sector depends on widespread adoption of new technology, and while several leaders have already taken the leap, the industry as a whole is not there yet. However, as the high cost and inefficiency of manual procedures becomes ever more unsustainable, the direction of travel is clear.
Across the commodities sector, companies have already accelerated the adoption and integration of digital technology throughout value chains. As partners in these complex ecosystems solve the final piece of the puzzle by bringing post-trade processes into the digital age, the future state of end-to-end digital commodity trade is at last within reach.