Geneva: the world oil trading capital
Oil trading. No city in the world is home to as many traders as Geneva. They are secretive, immensely rich and well-connected. A glimpse into the nerve centre of a global business also shows why the oil bubble burst.
This is the story of a handful of men who moved to Lake Geneva in the 90s to make billions, achieved their goal in a decade and still walk about the city unrecognized. It is also the story of the city that helped them rake in the money, and became richer in the process.
Torbjörn Törnqvist, Gennady Timchenko, Daniel Jaeggi, Marco Dunand or Daniel Fransen – their names are familiar only to insiders, and their companies are unknown to customers at the gas station. Totsa, Vitol, Gunvor, Litasco, Addax or Mercuria: those are Geneva’s independent oil-trading giants, who operate beyond the realm of the majors Exxon, Shell, BP and Total.
Take Törnqvist, for example. Wikipedia, the internet encyclopaedia, knows nothing about the Swede who learnt his craft with BP. Nor will Google tell you more. Törnqvist started his business more than ten years ago with mailbox companies in the British Virgin Isles, Cyprus and the Netherlands, founded together with his Russian partner Timchenko. In 2003, the companies started operations in Geneva, under the name Gunvor, at the address of a law firm.
Today, Gunvor’s traders occupy five floors of an office building at N° 14, Quai du Général Guisan, a lakeside promenade. Women in jeans and neat shirts and men with red braces or accountant’s suits sit on white leather chairs in spacious offices. Ceiling lamps bathe the rooms in soft light. Two monitors on the white trading desks supply employees with current market prices. Floor to ceiling windows offer an uninhibited view of the lake, the Jet d’eau fountain and the Mont-Blanc range on the horizon.
Here, simple emails direct whole fleets of oil tankers across the seas. A typical deal may run like this: under the reference “Gunvor contract – approx 75,000 mt”, a trader communicates information about a 75,000 metric ton delivery that was discussed on the phone the day before. Gunvor, the seller, is delivering Russian fuel oil to a buyer in Singapore. Interposed is a broker in France who brought the parties together. A Persian oil tanker is to take the shipment on board in Estonia and unload it within 18 days in the Indonesian port of Karimun Island. There, an inspector from SGS, the Geneva inspection company, will measure the density, viscosity and water and sulphur contents of the goods. The price is set on the date of unloading based on the Asia-Pacific Arab Gulf Marketscan rates, plus a premium of ten dollars per metric ton. As usual, payment is due forthwith by telegraphic transfer to one of Gunvor’s accounts.
Independent oil barons make billions
Gunvor will not disclose how much it earns in the transaction. A company brochure contains lots of words and pictures, but no figures apart from the page numbers. An insider says this year’s profit could reach USD 500 million, another suggests 70 billion turnover. That would mean dizzying growth: in 2004, turnover was estimated at five billion.
2008 was a roller-coaster year for Gunvor and the other trading houses. As long as the oil price was climbing to record heights, they made massive earnings. But then oil prices plunged, reaching a four-year low at the end of December, and their earnings collapsed. Given a constant margin, a higher price per barrel means higher profit. But when prices plummet, traders’ risks increase.
Theoretically, the world of oil trading is a two-tier universe. Here, in Geneva, you have the dealers who direct the oil tankers across the seas and buy and sell the physical commodity. And there, at the NYMEX, the New York commodities exchange, you have the speculators who use futures contracts to bet on future oil prices. A paper market.
Today, as much oil is virtually traded as is physically channelled by sea and pipeline from seller to buyer. Nobody really knows who influences the price and to what degree. Especially since, in practice, both worlds mix and the oil traders deal actively on the futures market. Payment is due at delivery: while their oil is on its way to the various ports of destination, traders have to protect themselves against price fluctuations, currency risks, political crises and dependencies.
For Gunvor’s traders, the greatest threat lurks in Moscow. They owe their success to the Russians. Today, their company is the largest buyer of Russian oil, which is extracted under the control of Rosneft, Gazprom and Sugutneftgas, undertakings close to the State. Since 2003, when the Russian oil company Yukos was taken over by the State and its CEO Mikhail Khodorkovski arrested, Gunvor’s business has grown fast. This at the expense of Petroval, the Geneva-based company which used to handle Yukos oil and is now sidelined. Other companies also lost huge market shares of Russian business to Gunvor.
The company first came out of hiding in the early summer, when it was accused of receiving preferential treatment from Russian premier Vladimir Putin. There were rumours in the British press that Timchenko, Törnqvist’s partner and co- controlling shareholder of Gunvor, was just a front for Putin. Timchenko defended himself publicly. Gunvor does not owe its success to any favours. “We are efficient oil traders; we rely on our excellent logistics, transport capacity, credibility and pricing policy”, said Timchenko. He denied that the premier was personally behind Gunvor. Putin’s reaction was: “Rubbish!”
Nevertheless, oil baron Timchenko does have excellent connections. He was born in 1952, the son of a Soviet soldier; he grew up in East Germany and in the Ukraine. He studied electro-mechanics at the engineering college in Leningrad, now St. Petersburg, and in 1984 he landed a privileged job with the ministry of foreign trade. Since then he is said to belong to Russia’s inner power circle. During the reform, Timchenko built up a state oil exporting company in St Petersburg, then relocated with the company to Finland. There, he made about five million euro per year but had to pay nearly two million in taxes. Not his cup of tea.
Geneva attracts a growing number of global groups
In 2002, he moved with his family to Lake Geneva where the tax office assesses him on a moderate lump-sum basis. He settled down in Cologny, on the outskirts of Geneva, in the same neighbourhood as his business partner Törnqvist. His magnificent villa in a park off the marina cost CHF 18 million, underground tennis court included. His friends describe the 55 year-old as unpretentious and he wears a cheap wristwatch. The Russian Forbes’ magazine estimates his fortune at USD 2.5 billion. Market analysts believe it is higher. Why does the symbiosis between gold and oil thrive so well in this city? Number crunchers gladly quantify the reasons: the low tax rate; SGS, the world’s largest inspection company with 50,000 employees, is based in Geneva and is an essential provider of services to the industry; and Mediterranean Shipping Company, MSC, has its headquarters in Geneva and is one of the largest shipping companies in the world with a fleet of 363 tankers. Others say that, as host to numerous international organizations, and with a 44% share of foreigners in its population, the cosmopolitan city is well-equipped in multilingual schools and kindergartens.
Those are all good reasons for global groups to establish their management headquarters in Geneva. Like Transocean, the world’s largest offshore exploration company, which on 19 December announced that it was relocating. 22,000 employees in offices all over the world will henceforth be managed from Geneva. A day later, Texas energy giant Weatherford announced its plans to move its group headquarters to Geneva. And Noble Corp., the number two offshore drilling company, is also thinking of establishing headquarters in Geneva. Group CEO David Williams explains what attracts him: “The stable business and financial environment, and the time-tested tax rules”.
Not Houston, Texas, but Geneva, Switzerland, is the new world capital of black gold. The mayor personally greets new residents and their families with a warm “Bienvenue, welcome”. Older residents show them the nicest places in the Old Town and explain the local hierarchy: today, Gunvor is the number three oil trader in Geneva. Only Totsa, the trading house of Total, the French major, and Vitol, move greater volumes. Last year, Vitol realized a USD 147 billion turnover with just 100 employees in Geneva. Then there is Russia’s Litasco (Lukoil), America’s Cargill and the smaller companies Addax Petroleum, Arcadia and Socar. All are outsized by the Swiss trading giant Glencore, which, as the sole exception to the rule, is not based in Geneva. The particularly quiet trading giant has its headquarters two hours’ drive away, in the small town of Zug. Glencore is run by Willy Strothotte, a Swiss national of German descent whose fortune is estimated between four and five billion francs.
Nobody really knows who drives the oil price and how far
Only the owners of the trading houses are really rich. They happily refuse other shareholders, and they disclose their financials to no one. Therefore, rumour runs rife about their businesses. As was recently the case for Daniel Fransen, a British national, whose company Vitol Energy is headquartered on the Boulevard du Pont d’Arve, a few minutes’ walk from Gunvor. On 11 July, when the oil price rocketed to USD 147 per barrel, a record at the time, the Washington Post considered Vitol responsible. It alleged that, on a single day at the Nymex commodities exchange, the company had traded eleven percent of all oil contracts. And that, on a single day in June, Vitol had traded contracts for 57.7 million barrels, speculating on rising prices. That is three times the USA’s daily needs. “Fundamentally incorrect”, Fransen denied. On that day in June, Vitol had actually speculated on falling prices – and only for the purpose of hedging its physical trades.
“Look at this curve”, says Jaeggi showing a block chart depicting the growth in value over time of a shipment of black gold aboard a tanker. Jaeggi, a dynamic fellow with a modern beard line around his mouth, has been established at the lively Place du Molard, not far from his Gunvor colleagues, since 2004. Downstairs, lobsters crawl about in a tank at the Brasserie du Molard, while upstairs, on the fourth floor of a 14th century townhouse, Jaeggi’s company Mercuria operates with an eleven billion dollar credit line.
The Swiss native, whose forebears hail from a farming village near Solothurn, realized USD 33 billion turnover in 2007 with his partner and co-founder Dunand. Jaeggi went to school in Germany, France and England; he studied political science in Paris and Geneva before starting his career with the Cargill Group and Goldman Sachs in London – the career of a modern-day Swiss financial mercenary. He explains why the market over-heated, with radical sentences ending in “you know!”: “Today everybody can bet on oil, even mom and pop”.
Conrad Gerber agrees: “Nothing has changed in the physical trading business. It’s the speculators who panic”. Gerber, the son of Swiss farmers, grew up in Zimbabwe and came to Geneva in the 80s. In his unostentatious office in the suburbs, there are piles of reports on tanker movements, statistics on logistics and customs data, all stamped “Confidential” or “Secret” in thick letters.
Gerber operates a kind of espionage bureau which supplies the industry with hot information. “We focus on countries that are hard to access, like Nigeria”. There, the wiry 60-year old has set up a network of agents covering the oil ports. He knows who is loading how much oil where: precious information for competitors. As a “tanker tracker”, he used to be able to influence the market with such information. Not any longer. Today, young futures traders speculate randomly, relying on bits and bytes of information fished up by chance in oceans of data.
Money managers are increasingly investing in commodities. Calpers, the Californian pension fund, invested USD 450 million in the sector in 2007. Overall, USD 200 billion is now invested in commodity funds. Since supply cannot keep up with demand, this drives up commodity prices. Half of the 1100 commodity-based financial products traded in Germany came on to the market in 2008, and the price bubble burst in the late summer. Yet investors cannot keep away. In September 2008, a manager of Wilhelm von Finck, Munich, an asset management firm, announced how he is investing in the new trend: “In terms of strategic asset allocation, commodities should account for 10% of the portfolio; at present they account only for 1.5%”.
Oil trading also plays into the hands of Geneva’s bankers
Despite all the philosophising over oil prices, Geneva’s traders agree on one point: prices will climb again. How much speculation underlies oil prices, and what price is the “right” price? “No idea”, says Jaeggi “but in December 1999, the barrel was at ten bucks and that was certainly too cheap!” He works it out for us: the financial risk of a freighter at sea with 2 million barrels for 42 days adds up to USD 23.5 million. Nowadays, daily price fluctuations are six times higher than they were in the 90s – not to mention the dramatic price swings on days when the market is jittery.
Traders therefore need credit lines, bridging facilities, guarantees and other securities. Those complex services are provided by Geneva bankers who have discovered a new source of business in trade finance. So Geneva has also become a leader in the oil money business. The Swiss Bankers Association announced that the growth of the trade financing business, which currently contributes four billion francs to the Swiss economy, is a national strategic target. Oil trading alone generates CHF 350 million per year in taxes – even though the tax office ungrudgingly spares the billionaire shareholders. In exchange, they provide 4600 jobs. And the city is awash in black gold.