“It’s time to stop building,” Ivan Glasenberg, chief executive of Glencore Xstrata, told his peers bluntly earlier this year. Worried about oversupply, he has followed his own advice, suspending almost 50 Glencore mining projects. But not in oil. While the commodities group has reduced capital expenditure in other divisions, it will invest $650m to grow its upstream oil business during the next two years.
Since Glencore absorbed Xstrata to become the world’s fourth-largest mining company, few investors have paid much attention to its energy business. But the oil desk, run from a low-key office in London’s upmarket Mayfair, is one of the world’s largest oil traders. And it also has ambitions to be a major producer. “Over time it could make a significant contribution to the bottom line,” said Jeff Largey, an analyst at Macquarie. Glencore’s history in the oil market precedes its interest in metals and mining. In the period of upheaval after the first oil crisis of 1973-74, Glencore’s founder Marc Rich established the foundations of the modern oil trading industry through spot transactions that challenged the status quo of long-term deals from Opec countries to oil majors such as BP, Royal Dutch Shell, Total and ExxonMobil. Glencore has built on that tradition during the past four decades to become the world’s second-largest independent oil trader. Last year, it traded nearly 3.2m barrels of crude and refined oil products, enough to single-handedly cover the oil imports of Germany and Italy combined. The trading heritage means that Glencore has historically profited much more from its oil dealings than from oil production, which was tiny. But Mr Glasenberg is trying to change that. Boosting oil output serves two purposes: to profit from much higher prices than in other commodities – while thermal coal and zinc prices are down 60 and 55 per cent from their record, respectively, oil is down just 25 per cent – and to a lesser extent provide a steady flow of crude for its traders to sell. The chief executive, with the support of Alex Beard, the former BP oil trader who has run Glencore’s oil desk since 2007, is taking a calculated risk. “The money is not big in oil exploration. Initially these aren’t $10bn-type projects,” Mr Glasenberg told investors in September, explaining a key attraction: medium-sized oil projects in safe areas require less upfront capital and are much less likely to suffer the costly overruns that have plagued the mining industry. “A well costs around $70m; that’s what you are risking on an exploration drill. It’s not a big, massive . . . project,” he said. The money is not big in oil exploration. Initially these aren’t $10bn-type projects - Ivan Glasenberg, chief executive of Glencore Xstrata Historically, all of Glencore’s oil production came from Siberia, through minority stakes in some productions units of Russneft, a medium-sized Russian oil company. Mikhail Gutseriyev, the Russian tycoon who owns Russneft, has suggested Glencore could become a major shareholder in the company through a swap of debt into equity. Glencore’s biggest oil interests today are in a cluster of countries in west Africa. It has oilfields and exploration prospects in Equatorial Guinea, Cameroon and Chad. The company’s third-quarter production update showed gross oil production from its interests in Equatorial Guinea had risen to 5.86m barrels of oil in three months to September, a 29 per cent increase on the previous quarter. The Aseng field in Equatorial Guinea has produced more than 38m barrels of oil for Glencore and its partners since it came on stream in 2011. Alen, also in Equatorial Guinea, has just started pumping while another prospect in Chad, through a joint-venture with Caracal Energy, shipped its first oil at the end of September. In addition the company is drilling appraisal wells in Cameroon. Acquisitions are also likely. Glencore’s metals- and agriculture-trading businesses have recently executed big-ticket deals with the purchases of Xstrata and Viterra, a Canadian grain dealer, respectively making the oil desk something of a “Cinderella” in Glencore’s internal battle for capital. But the company is likely to avoid the high-cost locations favoured by oil majors. It readily admits it has no edge in the “below-the-ground” expertise needed for technically or geologically difficult projects. “You will not find us in the North Sea, we won’t be in the Far East, we won’t be in the Gulf of Mexico and we won’t be onshore US production,” Mr Beard told investors recently. “It is not where we feel we add value.” Instead, Glencore believes, its expertise lies in resolving “above the ground” problems – such as dealing with the political and logistical challenges posed by regions such as west Africa, south and Central America and the former Soviet Union. But analysts say Glencore is unlikely to pursue a mega deal, instead looking to invest in projects that offer near-term production and exploration. One consultant said that the company is looking for opportunities like Chad, where Glencore last year invested just over $300m to acquire a 25 per cent stake in two oilfields in Chad from Caracal, a Canadian explorer. That is a textbook example of what could follow, analysts and industry executives say: a capital light project, with significant upside, in a country that most other companies would avoid. “It’s a private equity style approach,” said one company watcher.