Sideways: Gas spike a canary for carbon trading PR problems
Gas price volatility is delivering profits to speculators. It is a reminder that carbon trading markets could face PR problems if energy dealers are viewed as big beneficiaries.
Gas prices are surging, bringing pain to consumers and profits to traders. Among the winners from record prices for products such as liquefied natural gas (LNG) has been Gunvor, the Geneva-based trading firm.
Gunvor took the opportunity of a $300 million bond launch in the last week of September to share more financial information than it has in the past.
The news was pretty good – from a trading perspective.
Gunvor’s first-half revenues doubled from the same period in 2020 to reach $48 billion, with gross profit of $642.4 million and net income of $213 million.
“LNG performed strongly, benefiting from volatility and market dislocations and the natural gas business's positive performance continued during the period,” Gunvor reported.
The recent spike in energy prices for consumers is only likely to make conversations more, well, heated
Gunvor is keen to position itself as a participant in the move to cleaner energy.
“Gunvor’s leading position in energy transition commodities, such as LNG, natural gas, and biofuels, combined with our environmental, social and governance (ESG) objectives and conservative financial management attracted solid demand from a diverse group of quality investors,” said chief financial officer Muriel Schwab, in announcing the $300 million five-year bond.
What Gunvor branded as transitional energy commodity volumes accounted for 47% of total volumes handled in the first half of 2021, the firm said.
Investors in the $300 million bond were apparently convinced by this pitch – and perhaps also by the hefty 6.25% coupon on offer.
Climate activists may be a little more sceptical about the motives and ESG credentials of a trading firm that was co-founded by oligarch Gennady Timchenko to funnel oil from Russia.
Many activists would also take issue with the branding of gas products as a transitional energy source, even though gas is cleaner than other fossil fuels.
The debate over whether or not gas should count as part of the transition to cleaner energy will continue, but the recent spike in energy prices for consumers is only likely to make conversations more, well, heated.
Market dislocations that have driven up electricity prices and forced some energy providers to return to use of coal as a power source are coming at a bad time for proponents of much greater use of carbon-trading products, even if the base case for new instruments remains intact.
So-called compliance carbon markets are well established, especially in Europe.
The financial industry has high hopes for voluntary carbon trading that is not mandated by governments and could greatly expand the market for carbon offsets.
Standard Chartered chief executive Bill Winters is chairing the Taskforce on Scaling Voluntary Carbon Markets, which was launched by former Bank of England governor Mark Carney.
They have gathered over 250 institutions to join the effort and enlisted an impressive advisory board of environmental specialists.
Winters has extensive practical experience of developing scale in new markets from his days at JPMorgan and is highly regarded in the financial industry.
He faces a formidable task in coordinating the diverse interests in a market that would effectively be self-regulating, however.
The current spike in gas prices does not help as it could be a harbinger of future gains for traders at the perceived expense of consumers – the market equivalent of a canary in one of the last coal mines.
Hedge funds already predict big profits from carbon trading, and oil companies with dealing divisions could also be winners from higher activity in lightly regulated markets.
Voluntary carbon trading markets could be a tough sell to ordinary citizens and politicians if they are expected to deliver large gains to hedge funds, trading firms like Gunvor or Trafigura and oil firms such as BP and Shell.