An Inside Look at the Future of Energy Trading

Keo Lukefahr is the head of derivatives trading for Motiva Enterprises. She has worked in the energy industry for more than two decades serving in senior trading and strategy roles for several leading energy companies. Prior to joining Motiva, Lukefahr served as head of Americas Natural Gas and LNG Trading for PetroChina International, and vice president for Eastern U.S. Natural Gas trading for BP. Earlier in her career, she was a principal at the strategy-consulting firm Booz Allen Hamilton where she specialized in the energy sector. Lukefahr began her career as a crude and products trader for Cargill. She holds a Master of Science in Applied Economics from the University of Minnesota and a Bachelor of Science in Economics from the University of Washington. Prior to attending graduate school, Lukefahr worked for the U.S. Peace Corps in Africa.

Lukefhar talks to Rebecca Ponton about the state of energy trading and what it’s like to navigate the world of trading as we enter a new era.

RP: What does your job entail? What are your responsibilities as head of derivatives trading?

KL: As head of derivatives trading for Motiva, my group is responsible for providing central futures execution services for our physical teams, managing our system price exposure, and developing and implementing corporate hedging strategies. In addition to managing and executing all of the company’s derivatives trading, we also provide a strategic point of view of the market for the company, including supply/demand balances and price outlooks.

RP: How has COVID-19 affected your work and that of the traders under your leadership?

KL: Our derivatives desk spent nearly six weeks working from home. During this time, we were able to leverage existing technology to create a virtual trade floor and effectively manage our risk. While there are always advantages to being physically co-located, we were able to use voice and video conferencing as well as existing collaboration tools to establish a highly effective virtual trade floor at nearly zero incremental cost to the company. Our derivatives team began returning to the office in a phased approach starting May 4th. Motiva has been following the advice of the state of Texas and the CDC in a staged return to work plan.

RP: How has the price of oil falling into negative numbers in April, for the first time ever, disrupted trading? What adjustments had to be made?

KL: In the industry it was widely anticipated that prices would drop to very low numbers in order to clear the market and there were numerous articles in the industry press suggesting that negative pricing was possible. For weeks ahead of the negative pricing event in April the EIA and other public sources had been tracking a build-up in inventories and there was an increasing probability the market would have to solve by pricing in a manner to incentivize diverting barrels away from Cushing. Nonetheless, all of us were surprised by the extreme negative pricing we witnessed on April 20. I expect that the ongoing analysis by academics and others into what happened will show that the retail investor activity through popular exchange-traded funds (ETFs) and direct trading platforms (which have been widely reported to have locked individual investors into unfavorable positions due to technology glitches) may have been a significant contributor to the extreme price event that we witnessed.

RP: The energy industry, as a whole, is volatile and, by extension, so is trading. Based on your long career in trading, what would you say regarding the panic that ensues during times of wild fluctuation (and also during boom and bust cycles)?

KL: The past several months have demonstrated the incredible resilience, efficiency, and effectiveness of the energy trading markets. The energy system encountered three simultaneous shocks that were each, in their own right, unprecedented in scope and scale. The COVID impact on supply and logistics, the unprecedented transportation fuels demand drop, and a simultaneous collapse of the OPEC price support program that has been a foundation for crude production and supply for more than forty years. Despite these simultaneous shocks to the system, crude, products and other forms of energy were widely available, contracts were honored, and there was no significant disruption. In short, there was no panic. Moreover, thanks to the highly efficient derivatives market, most producers and many refiners had already shielded their operations from the unexpected price volatility through hedging. As a result, we saw far less abrupt financial distress in energy than we have seen in many other industries – from airlines to restaurants to retail.

RP: With everything going on right now – global pandemic, drop in the price of oil, stock market crash, a recession – what does the future of trading look like?

KL: People often think of energy trading markets as somehow similar to the stock market or the currency market. They are not. Those markets are merely price discounting mechanisms that reflect the current consensus value of an asset with an infinite (or at least indeterminate) lifespan. The energy markets deal in assets that are produced and consumed on a short time scale. Their purpose is to ensure the right energy product gets to the right place at the right time in the most efficient manner possible while allocating price risks to the entities that are best able to bear them. Throughout the unprecedented market shocks of the past several months, the energy trading markets have performed brilliantly. Product from tens of thousands of production sites were efficiently routed through the more than half a million miles of logistics assets and thousands of vessels to the right storage and refining assets. The market provided accurate and timely signals to ensure the hundreds of refineries around the world adjusted product mix and output levels in real time to get the correct final products into the hands of billions of consumers in real-time with maximum efficiency and almost no disruption. That is an incredible accomplishment and it underscores the efficiency and effectiveness of the global energy trading system. Not only that, it managed to accomplish this feat while the vast majority of market participants were working remotely from home!

The market is already learning important lessons from the past several months and will be making changes to manage these even better in the future. We are already seeing zero-dollar floors in physical crude contracts, for example. I suspect that there are at least a few retail trading platforms working on fixing their IT glitches! The longer-dated futures contracts will better price in these sort of black swan events. We will see countless other small improvements inside individual companies, in the electronic exchanges, and in the contracting structures. Of course, the long-term trends toward more electronic trading will continue, as will the continual refinement of algorithmic assistants and increasing transparency in information enabled by technology. I expect we will continue to see innovation on traded products, increasing innovation in derivative instruments that are better designed for specific needs, and continued expansion of the markets to provide liquidity and efficiency in emerging markets.

When someone writes a business history on this period, I think they will conclude that the world’s largest, most complex marketplace – the global energy market – endured simultaneous and unprecedented economic shocks and continued to operate effectively, efficiently, and to ensure suppliers and customers contracts were fulfilled as promised. That is a great story.

Headquartered in Houston, Texas, Motiva refines, distributes and markets petroleum products throughout the United States. Motiva owns and operates North America’s largest refinery in Port Arthur, Texas, with a crude capacity of more than 630,000 barrels a day. The company also operates the country’s largest lubricant plant as well as the adjacent chemical plant, Port Arthur Chemicals. Under exclusive, long-term brand licenses with Shell and Phillips 66 (for the 76® brand), Motiva’s marketing operations support more than 5,000 retail gasoline stations. The company’s 2,700 U.S. employees are dedicated to delivering excellence and having fun making a difference. Motiva is wholly-owned by Saudi Aramco.

Headline photo courtesy Keo Lukefahr – Keo Lukefahr at Motiva’s Houston office.

---

---

Energy Trading’s First Female CEO Insists on Business as Usual

In late April, Denmark, one of the first countries in Europe to shut down due to the spread of COVID-19, gradually began reopening its economy and society. Twenty-five percent of Danske Commodities’ employees were back in the office after working from home since March 12th. As of May 18th, another 25 percent were allowed back under strict guidelines.

“From Day 1, I insisted on business as usual,” says CEO Helle Østergaard Kristiansen of working from home. It was a rather unceremonious and unsentimental way of observing the one-year anniversary of her appointment as the first female CEO in energy trading, but these are unique times. Calling the digital capabilities at DC (as the company is known) “our special superpower,” Kristiansen says employees were working from home within two days.

“We quickly established trading desks in the homes of our traders to ensure the safety of our people while doing our part to keep the energy supply balanced and stable.”

To monitor the level of activity, which actually increased, she asked for data on how many trades were done each day. “I didn’t want to accept that we couldn’t do tomorrow what we did yesterday.”

Since assuming the role of CEO, Kristiansen has had a clear vision of how she wanted to implement her leadership style. “I changed the name from ‘senior management group’ to ‘senior leadership.’ It was not [just] a matter of wording. It’s because I want leaders; I don’t want managers. We have a lot of young talent and they don’t want to be micro-managed. I wanted leaders that could inspire them, develop them, give them responsibilities, and support them in their professional but also their personal lives.”

Creating the strongest possible workforce is important in giving a competitive edge to a company with ambitious plans for the future. “In the U.S., energy trading is very much based on data and quantitative models and that’s exactly where we come from. It’s actually deeply rooted in our DNA to expand our business model to new markets. Equinor has ambitions in the U.S., where DC could support those ambitions within green energy and the transition [to] renewables, where we are very strong in Europe. We can use the experience we have here and take that to the U.S. while the market matures in that direction.”

Firming believing “the future of gas trading is automated,” DC has recently onboarded a 20 TWh downstream gas storage portfolio from Norwegian gas major Equinor – a substantial increase to DC’s existing portfolio and setup, which has been made possible by employing automation. At the same time, a large portfolio and access to assets provide flexibility and more opportunities to trade. Since becoming part of Equinor last year, DC has increased its traded gas volumes by 44 percent.

As Kristiansen looks back on her first year as CEO, she says frankly, “You’re always concerned when you get acquired by a big company like [Equinor], but we have managed to put ourselves in a situation where our employees honestly believe that being part of Equinor is a benefit for DC as a company. We have been able to explore the synergies between our two companies, and still have agility and independence at the same time, so we’re actually in a much stronger position than we were a year ago. I’m really proud of finding that balance.”

“This acquisition has been a success.”

Re-printed by permission from the author. A longer version of this article originally appeared on Forbes.com on May 17, 2020.

---

---

Ian Taylor, Chairman (1956 – 2020)

The world of energy trading lost one of its most influential players June 8th with the passing of Ian Taylor, Vitol’s former CEO, and Chairman at the time of his death at 64, following a long battle with cancer. The announcement from Vitol included a short statement by CEO Russell Hardy, who succeeded Taylor in March of 2018. “Ian was an exceptional man. He combined energy and a determination to succeed with humility, humour, and humanity. He challenged all of us to be the best we could be. We owe him a great deal.”

Taylor was part of a legendary trio that included Glencore CEO Ivan Glasenberg and the late Claude Dauphin, co-founder of Trafigura, who passed away in 2015. Together, the three were considered the founding fathers who revolutionized the modern commodity trading industry.

A student of philosophy, politics, and economics (PPE) – a course of study he once called “useless” – the Oxford-educated Taylor started his oil trading career with Royal Dutch Shell in 1978, not knowing what the company did, but needing the income, before joining Vitol in 1985. Within a decade, he became CEO, taking the company from a small Dutch fuel merchant to the world’s largest independent oil trading house, moving more than 7m barrels of crude and oil products a day. Unlike his rivals, he refused to take the company public; instead, approximately 350 top executives own shares in the privately-held company.

Described in the press as a “swashbuckler” and a “buccaneer,” Taylor was a bit of a James Bond type. One of Britain’s wealthiest businessman, he jetted all over world not just to do business, but often to engage in deals with rogue regimes, including those of Iraq, Iran, and Libya, using the argument that, “Every country has to buy and sell oil,” and citing the nearly one billion people worldwide who do not have access to electricity. “There’s a tremendous amount bluntly yet to be done.” However, he drew the line at talks with Enron, the disgraced American energy trading company, telling the Financial Times, “There was one meeting but the culture clash was obvious.”

“Ian was one of the last of the pioneers that helped transform the oil trading industry,” said Glencore CEO Ivan Glasenberg, the only remaining member of the original trio of revolutionaries. “He will be missed.”

In contrast to his daredevil business personality, Taylor had been married to wife, Cristina (Tina) Alicia Hare, since 1982 and together they were parents of four children. He was a patron of the arts and a generous philanthropist and is credited with saving Scottish textile manufacturer Harris Tweed Hebrides, maker of the iconic cloth, from financial crisis in 2007.

In one of his last acts of philanthropy, Taylor, who was first diagnosed with throat cancer in 2014 and, after a recurrence, eventually underwent Proton Beam Therapy (PBT) in Switzerland in 2018, donated £4.5 million through the Taylor Family Foundation to help fund large-scale clinical trials at the world-renowned Christie Cancer Centre in Manchester. Taylor told the BBC last year he “passionately believe[d]” the therapy can help specific kinds of cancers. It will now become part of the legacy for which he is remembered.

Re-printed by permission from the author. A longer version of this article originally appeared on Forbes.com on June 12, 2020.