Industry viewpoint: Growing rewards for energy traders that make digitalisation a priority
Wednesday, February 9, 2022
VAKT client Gunvor Group’s global head of operations Andrew Archer explains why the energy and commodities trading industry needs to adopt digitalisation platforms sooner rather than later, as a convergence of factors means paper-based processes are becoming not only obsolete but a threat to business, while on the flip side, technological advances are paving the way for a brighter future.
The energy commodities sector has long been characterised by its reliance on relatively antiquated systems, as its consistently low ranking in Boston Consulting Group’s (BCG) annual global survey of digital maturity across ten industries attests.
However, this looks set to change. The Covid-19 pandemic and ensuing disruption made the industry acutely aware of the need for a better way of squaring off trades and managing end-to-end processes. That extends to the ability of traders and brokers to confirm transactions, inspectors to update and report key shipment information, ship owners to confirm booking and event data, and for terminals and pipelines to seek more visibility over demand and capacity.
“The pandemic has definitively sped up the digitalisation of all front-to-back processes, or at least the willingness to do so depending on the size of organisation,” says Andrew Archer, global head of operations at Gunvor Group. By the end of the year, the Cyprus-based firm, which is one of the world’s largest independent commodities trading houses by turnover, will have digitised all paper trades and, where possible, physical trades too, Archer says.
With estimates showing that the digitalisation of post-trade processes could lead to savings of up to 40% across operations, accounting, settlements and technology infrastructure, the benefits are clear, he adds. “It’s an iterative approach. But beginning to chip away at those very manual processes brings value and increases efficiency.”
Recent high-profile fraud scandals within the commodities sector, made possible by opaque paper-based processes and a lack of digital confirmation facilities, have made financial institutions wary of providing trade financing to the industry, with some pulling back entirely.
With margins down and financing hard to come by, banks’ reluctance to lend as well as onerous requirements have made doing business harder – especially for smaller players.
This is where VAKT makes a difference. VAKT connects various stakeholders in the ecosystem, enabling them to contribute data from trade entry to final settlement while doing away with reconciliation and paper-based processes. Built on blockchain technology, VAKT replaces unwieldy email and fax chains and helps smaller industry players survive by lowering the unit cost of physical transactions. Most importantly, it 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.
Gunvor’s Archer says the underlying blockchain technology transforms the entire trade. At its core, blockchain technology ensures that record keeping cannot be tampered with, as records exist in parallel in different repositories along the chain and no change can be made without a counterparty signing off on it.
Turning ESG compliance into an opportunity
In 2018, Gunvor became the first energy commodities trading company to close a sustainability-linked finance deal. As demand has risen for financial solutions that also address the key sustainability challenges in this sector, companies increasingly need to be able to demonstrate performance improvements in environmental, social, and governance (ESG) criteria.
“Across the board, more information and transparency is being demanded by financiers, governments, non-governmental organisations, trading companies and majors,” says Archer. “By partnering with our banks to set goals that achieve substantive results, we are demonstrating the seriousness with which we integrate sustainability into our business, but to do this, it’s important that data be accurate, complete and most importantly, verifiably authentic.”
By moving away from unstructured communications to machine-readable data, the industry can gain insights into ESG performance as well as measure the environmental impact of commodities trading to monitor and lower emission footprints. For its part, Gunvor has announced targets to cut scope 1 and 2 emissions 40% by 2025, and the company is currently measuring its scope 3 emissions to set additional goals.
“There are companies in the industry who want to make a positive contribution,” Archer says. “And digitalisation is one way to demonstrate the concrete actions they are taking.”
What’s more, beyond business performance, digitalisation can also be leveraged by those companies that are looking to the triple bottom line of profit, planet and people.
“When we talk to younger talent, their first thought is about the environmental consequences of what we do in the oil and gas sector,” says Archer. “Blockchain solutions work for all sorts of products, including those which relate to the energy transition, so we know we are working with a product which will deliver value irrespective of the commodity in question.”
The energy transition presents a complex and nuanced challenge for industry and society as a whole – many questions can be answered via data which is viewed as trustworthy,” he adds.
An effort that will pay off
In the past, trading companies have sought to keep their business model intact by trading on information asymmetry within global markets. While some fear that this could change with an electronic platform that would make information more accessible, that view increasingly runs the risk of being out of lockstep in a rapidly evolving world, Archer says.
“Run on a private and permissioned blockchain, VAKT builds trust in the data and between partners while ensuring data privacy,” he says. “Because different types of data are accessed only by users with granted permissions, all actors within the ecosystem can benefit from greater transparency in tracking their post-trade processes within a trusted, secure environment.”
He adds that businesses need to look to eliminate risks wherever they can rather than when it becomes inevitable. “It's about being on a journey of continuous improvement rather than avoiding errors. Organisations are focused on reducing the time spent on tasks that are important but ultimately don’t add value.”
For many companies in the energy commodities sector, 2022 marks the beginning of the next phase of the digitalisation journey – but reaping the benefits will require a concerted push from all players.
“Everyone expects a lot from digitalisation, but reaching a state-of-the-art environment requires significant effort from everyone,” says Archer. “VAKT has connected the ecosystem, from traders and brokers to terminals and inspection companies. As the industry continues to implement technological advances, each of these players is positioning themselves to make the most of the coming digital revolution.”