The 11th commandment, the trading floor and energy companies

I love this story.

torygraph

http://www.telegraph.co.uk/finance/newsbysector/energy/10223990/BP-blames-trainee-error-as-it-faces-29m-penalties-in-US-gas-market-fixing-case.html

Probably because it involves an awful lot that’s relevant to my current position, but also my wider career, and what it tells us about the inherent conflict between the mentality of the trading floor and the Integrated energy company.

Firstly the trading: As some of you might be aware, I started off as a kid running errands on trading floors in the City, and even got to do a bit of trading (treasury derivatives, forex etc) before it all became apparent that it wasn’t for me as I wasn’t particularly (eg at all) suited and finally I would always be my Dad’s son. I love being my Dad’s son, he’s taught me a lot of important stuff and is probably my best mate, but Johan Cruyff and Jo Frazier’s kids probably both wished they hadn’t tried the same thing that made their surname famous. At least I didn’t get knocked out.

Then there’s the energy side. My MA might as well have been called “how to invade sovereign states and steal their resources”. I have spent the last 13 years advising energy and resources companies on their communications, with particular focus to capital markets exposure. This is the life I’ve chosen and I’ve loved it, even the weeks in Almaty, Eastern Europe and bits of Africa drinking myself towards an early grave; the late nights and early starts, trying not to fall over my own feet at London Bridge. There’s always something going on, which always has 5 different aspects to it. Oil, money, geopolitics, human weakness. So that’s 4. Sue me

As with one of my favourite literary characters, “Where love and need are one, and the work is play for mortal stakes etc” (sorry)

Consider the absolute joy with Emily Gosden has written the story and a number of energy journos were discussing it on twitter yesterday. It’s just a great story; globally famous energy firm getting screwed by a regulator because of a gobby junior trader. It’s almost cinematic; exposing the dangerous fault line between highly regulated industries that are also household names, and the cult of the trading floor, where speculative and risky behaviour is still (correctly) rewarded with cart loads of wedge.

Hang on, hasn’t Michael Douglas and the Sheens already done this?

Anyway, where was I?

The way I see it, there’s a few things to consider here. I am constantly joking about the 11th Commandment. “Don’t get caught”. In my experience it’s incredible how much corporate life is governed by the 11th commandment. Potential conflicts, breaches of regulation, deliberate obfuscation, out right lies, working for the devil. All of them appear to be acceptable if you can get away with it.

The great unwritten rule, but god forbid if you get caught. Like jumping at 20,000 ft without a parachute, or going down in the Barents in January, you are, entirely justifiably, screwed.

Some of the most successful traders I’ve known or heard about sailed very close to the wind; went right up to the line. Some of them probably went up to the line, laughed out loud and kept on going, and gave the appearance of being carefree. However, I bet they only went so far. There will always have been an escape route, because they were great traders and could immediately and instinctively manage risk.

But plans are only as good as the weakest link and in this situation there are two. Whilst BP maintain their innocence and this has to be accepted until the legal process is completed, the first problem is that BP had already copped to something similar before re propane prices The second is that enthusiastic young traders need VERY careful managing and need to understand where not only they but their institution fits in the wider corporate animal.

Trading floors are all about risk incentivisation. This is great if you’re a boutique, or part of a wider organisation where remuneration is directly linked to personal / departmental p&l, but what happens if your job is primarily to hedge against and manage the exposure of a wider corporate beast that has a very different mentality to that of the floor?

So we come to the nub of the issue. How do IOCs maintain top quality trading floors, with top quality traders, but also manage to maintain their essential corporate conservatism?

Whilst many IOCs give the impression of being prepared to take significant risks on multi billion investment programmes in funky parts of the world, they are actually instinctively conservative, with procedures for everything. They wait for wildcats to go and find the oil, then buy them out, whereby massive capital and operational punch will turn the oil into millions of dollars of income. Procedures are in place across the entire organisation for a few reasons.

The first is physical safety. Piper and Maccondo demonstrates what happens if a firm is anything less than rigorous in its safety procedures. Conservative is vital in such a potentially hazardous environment.

The second is about reputation and its maintenance, about “Permission to Operate”. In an independent firm, decisions are taken quickly, statements are drafted, operations are managed, because the timetable to monetization is so short. It’s all about quick growth to pay off investors and onto the next project. For the big boys however, it’s about maintaining the ability to drive income from a supergiant fields for decades. This means everything takes a long time to make sure they’ve got things right. I’ve waited a month for one of the big boys to agree wording on a press release on a deal that was an open secret in the industry, for fear of getting it wrong.

So how do the big boys manage this conflict? Firstly there’s remuneration. It’s one of the few jobs that is applicable with investment banking; largely because you can easily move from Chevron to Deutsche, doing the same job. Cash is, as we all know, a flexible tool.

Then there’s the process of indoctrination, or as my colleagues call it, “internal communications”. Trading floors are pummelled with information about their place in the world and that place is to make lots of money and not to come to anyone’s attention.

That’s right; the big energy firms follow the 11th commandment as well. Trading arms are balance sheet significant to all the major IOCs, but how often do the general public hear about them? How often are they in front of investors? Sometimes it’s just easier to pull a veil over an issue.

And that’s why we won’t hear about much of what goes on at BP IST or Shell Trading or the others until another actor gets involved like a regulator. Or there’s another Enron. Or an independent trader that is a counterparty to the big energy brands dumps toxic waste off West Africa. Obviously traders want to make sure that their positions are confidential for commercial purposes, but I reckon it’s got nothing to do with them.

Just because the job is vital to the commercial health of a company, it doesn’t mean that it should ever get the light of day. “Sit in the corner, shut up and make us and yourself a lot of money” is often the SOP.

This lack of transparency is the final ingredient in the story. There’s something secretive and mysterious about trading floors for those that haven’t worked on them. It adds to the joy of journalists like Emily that get a great story.

But for BP, Shell, Total etc, the story is simple; “these aren’t the droids you’re looking for, move along.”

IOC head of comms, deputy head of comms with a trader just visible behind them

IOC head of comms, deputy head of comms with a trader just visible behind them

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