Executive Interviews

Mike Muller, Head of Global Crude Trading, Shell

August 2017


What are your thoughts on China’s position in global oil markets?

China has the largest demand growth in oil markets, and as such, it’s a very important market for us.

Over the past few years, we’ve seen some of our biggest Chinese counterparts evolve their position in overseas markets, including: upstream and shipping. The advent of the independent refiner and the granting of import licences and import quotas to those independent refiners – better known as “teapots” – has commanded much attention in 2017. Numerous Chinese counterparts now count themselves amongst the most sophisticated global players and we very much see them as equals with whom we wish to develop more long-term sustainable business – both in China and overseas.

As independent producers adapt their strategies, what does it mean for majors in the trading game?  

Independent producers are a key category of customers for us. We can help them detect early on when a market is about to get weaker and become a buyer’s market, as well as when a market’s about to get stronger and become more of a seller’s market.

An increasing number of independent producers in, for example, North America, choose to hedge their future production. In so doing, the actual implications of spot prices lessen as a producer who hedges at $50/bbl isn’t going to care whether the oil price has dipped below $40/bbl.  Hedging drives different behaviours and it’s just one example of how independent producers have adapted their strategies.  

Many of these producers have ended up with lending institutions financing them and providing hedging services. Such lenders like to see Shell as the off-taker for credit reasons, but often these producers need to do more to cover funding shortfalls, so we’ve chosen to change the way we do business by ourselves offering more innovative and integrated offtake solutions which can include Shell participation in activity previously associated only with financial institutions. 

What’s the most important element for your customers given the dynamics today? 

Every trader’s mission in life should be to find out exactly what it is the customer wants in a deal, and then try to deliver or beat it in a way that allows both parties involved to derive value. We have a deep understanding of the supply chain which provides a unique experience that helps our counterparts, be they producers or refiners, to meet their needs. 

We’re interested in listening to what customers need from us and, in fact, what customers are expecting from us always tops the agenda at the annual in-house conference for our Trading and Supply division.  Each year, we invite key customers we work with to tell us what it is about us they value and if there is anything we can do to improve our services to them – the objective being to cut deals that are mutually profitable and hence sustainable over time.

This applies equally to customers in the refining space, many of whom have come to trust that we’re out there visibly and demonstrably to maximise value for them, so much so that they wish to deal with us. 

How are you navigating uncertainty in the oil markets?

We have teams within Shell dedicated to analysing oil markets who try to answer this question day in and day out.

If you look at published views from various experts on where they think the oil price will be next year, many suggest numbers that are closely clustered together in the mid to high $50s. Such consensus is volatility reducing.  Part of our purpose is to help our customers mitigate market imbalances and cope with volatile market conditions.  The less uncertainty, the less demand there will be for certain services provided by traders. But history would suggest commodities are cyclical in nature: price movements are often required to trigger actions such as growth or reduction in investment which in turn serves to re-balance supply and demand. As such, the industry might see greater volatility in years to come.

The other point to keep in mind when considering how to navigate uncertainty is performance risk.  In markets that are less well-regulated, consequences for non-performance are not necessarily as rigorously enforced as they would be in a transparent and well-regulated marketplace. The uncertainty of non-performance is something we have to factor into some markets more than other.

Stability is good for investors. We stress test all our major new business proposals – ranging from supply deals with refiners to investing in infrastructure – to ensure we’re ready for the unexpected. 

What impact does a “lower for longer” or “lower forever” price environment have on your relationship with independent producers? 

A low oil price environment is a challenge to all high-cost producers. Some of these producers have become more dependent on borrowing and hedging to cover their needs to meet drilling commitments to maintain or grow their production. A further consequence of a lower price environment is that differentials we trade are being compressed. We are known for being happy to manage differentials that other service providers may not be comfortable with.

Upstream producers now think more carefully about their cost structure and how they value the offtake service a counterparty like Shell provides. After all, what many producers want is to sustain their growth objectives and carry on with exploration drilling or production programmes. The certainty of offtake and security of borrowing at fixed rates have become prerequisites for many producers and we’re always open to conversations around how we can partner in this space.

How does integration play a role in the way you do business?

Our Shell Trading and Supply organisation combines our network of legally separate trading companies, industry-leading shipping and maritime capabilities and an integrated network of supply and distribution activities. This end-to-end integration creates opportunities to deliver value for our customers.

For example, in the upstream space integration means we’re more capable of providing offerings to counterparties in upstream who don’t solely sell oil. This means Shell’s crude trading business will also seek opportunities with companies who may be interested in other services alongside oil offtake, which could include gas, power, carbon or risk management requirements. 

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