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Reuters: Oil majors take aim at Wall St's hedging business

Tue Mar 21, 2006 5:37 AM ET
By Jonathan Leff
SINGAPORE (Reuters) – Oil majors seeking new ways to build on record profits have embarked on a mission to steal a bigger slice of the billion-dollar energy risk management pie from investment banks, reshaping the oil market in the process.
Long adept at managing their own risks, giants such as BP Plc. (BP.L: Quote, Profile, Research) and Royal Dutch Shell (RDSa.L: Quote, Profile, Research) are stepping up efforts to sell their expertise to other companies like airlines or utilities who want to hedge their exposure to volatile prices.
This will amp up the competitive pressure on industry leaders Goldman Sachs (GS.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research), who depend on customer business for the foundation of their trading operations, and could give the majors extra leverage in their core markets.
BP last year hired new risk experts such as quantitative structurers — advanced mathematicians who construct and track complicated options and derivatives deals — for its revamped risk management division, which has been around over 10 years.
Shell, which has offered oil, gas and power risk management services to U.S. customers for a decade, set up a team in London in 2004 to target Europe and Africa.
Chevron Corp. (CVX.N: Quote, Profile, Research), bred from a more conservative trading background than the European majors, is the latest entrant and hired two professionals last year to launch its risk business in the United States, industry sources say.
Total (TOTF.PA: Quote, Profile, Research) has a strong franchise in French and African markets and two decades of experience, while top earner Exxon Mobil Corp. (XOM.N: Quote, Profile, Research) is the black sheep of the group and eschews any form of derivatives trading for itself or others.
With profits of over $100 billion last year and market capitalization above $1 trillion, they are a formidable bunch.
“I believe oil majors are a real competitive force against investment banks, as the overlap in services being offered… in the energy sector becomes smaller and smaller,” says Tom James, principal of Deloitte & Touche's Energy Markets Practice and a risk management veteran of nearly two decades.
Goldman and Morgan, the biggest paper oil traders in the world, have dominated the energy risk industry since the 1980s and make billions each year by hedging for their customers.

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