Fifty Shades of Green
Global Risk Management (GRM) provides energy price risk management to most energy-intensive industries, including the shipping industry. It has been in business for over 15 years as a successful standalone entity within the broader Bunker Holding Group.
Peder D. Møller, the CEO, has been in charge since May 2020 and has recently overseen a strategic rethink of both GRM’s role within Bunker Holding Group and the quest for a greener future in the global shipping industry.
He and Kevin O’Reilly, GRM’s CCO, believe that the derivatives hedging markets will play a critical role in establishing new and cleaner sources of bunker fuels.
Capital and investment are critical in business, and people and firms need help to bring new technologies to commercial viability.
Debt and equity are two pillars of the capital structure, but there is a third pillar of investment capital, viz., risk capital.
Risk capital exists when companies can hedge commodity price exposures inherent within their operations, guaranteeing future cash flows and profitability.
For example, risk capital allows the construction of a power plant, a refinery, or a mining operation because the investor knows it will be profitable – it has already sold production at an economically reasonable price.
The commodity markets, just like the debt and equity markets, can allow capital to flow and make things happen.
Although Bunker Holding Group provides credit to its many bunker fuel customers through its solid financial foundations, it is not a bank.
Therefore, it cannot contribute debt or equity to any new green enterprise unless through a 100% acquisition. However, GRM, through its potent derivatives capabilities and access to most forward commodities markets, can provide the risk capital that users and producers of energy commodities need to engage new commodity markets and products.
In discussing the starting point for his strategic resent, Peder says: ‘The core operations of the company had been successful and should continue. But, as we say in Denmark, “GRM will extend the floorboards,” meaning quite simply they will do even more of what they do well.’
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However, he highlighted, ‘the other key pillar of our new strategy is about the future, the need for sustainable and greener alternatives.’ Kevin O’Reilly was appointed Chief Commercial Officer of GRM in the summer of 2020.
He has spent over 25 years working in commodity trading globally, across most major commodities, and every aspect of sales, risk management, and financing.
Half of Kevin’s career to date had been at Morgan Stanley. Under the legendary leadership of Colin Bryce (now a Founding Partner at Energex) and Simon Greenshields (current CEO of commodities titan Phibro), Morgan Stanley, along with Goldman Sachs, became part of the commodity duopoly known as the Wall St. refiners.
Morgan had diversified its energy interests far further than just oil trading. In 2004, it invested in MGM, a carbon offset company helping clients generate EUA credits.
In 2005 Morgan signed a memorandum of understanding (MoU) with Cheniere for LNG imports (and in 2010, as the US switched from importer to exporter, thanks to shale technology, it had also supported Cheniere). In 2006 it helped a biomass power plant in Wales (with wood pellets no less) and in 2007 invested in a tidal
Morgan also helped to develop the nascent solar power market by buying panels, developing projects, and agreeing to long-term Forward Purchase Agreements for developers – another example of risk capital helped create a sustainable contribution to the US grid.
‘Over the years, these forays into new and sustainable markets helped impart the knowledge repertoire that I needed to help create a new green focused strategy at GRM,’ says O’Reilly.
Tremendous gains in electricity generation from wind, solar, and even tidal power sources have occurred over the last 20 years.They have changed the European power stack, including reducing some power prices to zero (and even negative), but they are all essentially serving load to static end users.
Likewise, electric car usage and battery storage are on the rise. Still, we are many years away from creating infrastructure that can support an entirely electric motor fleet and battery storage remains ephemeral relative to the constant needs of human beings.
The purists want a net-zero carbon future, but neither the technology nor the funding is available yet, so it is to the transition fuels, and what they can offer we must turn.
Realists could counter that mining the metals needed to build that infrastructure might damage other critical ecosystems and cause other environmental concerns.
Some have suggested that the enthusiastic farming of palm oil did this a decade ago – it released more CO2 into the air than was saved from creating biofuel.
For ships, the combustion engine will remain in place for some time to come.
However, how we feed that engine determines the ship’s carbon footprint, and how we produce a transition energy source determines how much carbon will end up in the atmosphere.
Of course, for the purist, carbon is evil. Still, suppose we can recycle carbon or increase its efficiency.
In that case, we can continue improving the environment by promoting transition fuels and reducing emissions while we all work towards an actual carbon-free future.
‘The most likely transition fuels to help shipping include LNG, LPG, methanol, ammonia, biofuel [any energy derived from biomass, plant material, or animal waste and considered renewable], and hydrogen in its many shades of green and blue,’ says O’Reilly.
GRM wants to provide cost-efficient access and liquidity in green markets to clients in need of price risk management that encourages and promotes both the production and the use of greener energy sources.
It sounds great, but in practice, what does that mean?
What was fundamental to the strategy that Møller and O’Reilly have created was the following question: How hard is it to develop markets in biofuels, ammonia, or even hydrogen? Can it be done, or are there other ways for users and producers to hedge? Was it going to be akin to Enron 20 years ago trying to hedge the weather? Or can something be done that will help everyone?
O’Reilly had been a frequent visitor to the fabled Enron weather floor in 2001 when visiting his friend Russell Dyk in the natural gas trading division.
Transition fuels based around natural gas are controversial in some quarters. And the cost of production and consumption of a transition fuel still largely correlates to a more traditional or established energy contract. So, for example, there are biodiesel contracts, and there is a listed contract in ethanol.
But since transition fuels seek to compete with a terminal market based on regular diesel or natural gas, then it is partly through those markets that we can hedge as we look to develop and use greener fuels for shipping.
‘For GRM, it is crucial to be competent and confident in our role as liquidity providers for those established gas, diesel, ethanol, and EUA/VER markets. From here, we can help develop markets linked explicitly to the transition fuels discussed above. This idea is the essence of the new strategy,’ Møller explains.
O’Reilly also offers his commercial perspective:
‘Support the markets that support those fuels and be present and participate when new contracts are listed and created to hedge the commodities above more efficiently. This support might mean making an over-the-counter swap referencing Platt’s quote on methanol or biomass or offering options on natural gas or LPG to lock in the economics of LNG transportation.’
To succeed in this new strategy, GRM plans to invest further in trading and risk management staff to increase natural gas access in the EU and the US for their clients.
It will continue to trade many grades of diesel and biodiesel globally and will soon trade ethanol, EUAs, VERS, RINs, and biomass.
The company says that its past 15 years of experience in serving clients coupled with an awareness of the rapid pace of change in what clients need means that GRM is looking forwards to another 15 years of success.
And the last word goes to O’Reilly: ‘As Albert Einstein said, problems cannot be solved at the same level of awareness that created them: GRM will be part of the pollution solution through this strategic rethink.’