New wave of online B2B oil markets take fresh approach

LONDON, Dec 20 (Reuters) - A host of new online ventures attempting to bring the shadowy world of physical oil trading onto the Internet are racing ahead to establish a leading role in the yet undominated market, industry executives say.

Despite the lack of conspicuous success in the first wave of ventures into the traditionally telephone-based market -- and the failure of one of the biggest Internet energy markets, EnronOnline -- new companies are forging ahead with high hopes.

But unlike previous efforts aimed at creating a viable electronic marketplace for trading the widely varied and non-standardised physical oil market, these companies are offering an array of services to ease the burden of business.

They are hoping oil traders will adopt, not adapt.

"Any services company ignores existing business practices at its peril," warns Steve Helleman, CEO of Oilspace, which hosted the first live transaction on its proprietary Nexus auction and negotiations system in September.

"Our attempt is not to create a market place per se, this already exists. Our objective is to provide tools and services to allow them to streamline their operations."

In addition to its tendering system, Oilspace offers risk management, information services and secure communications.

PlattsDirect has also launched this autumn, hoping the company's core competency in its flagship oil price information and assessment publication, Platts, will give it insight into capturing a market in the nascent online business.

And more ventures are in the works. Oil-on-line hopes to test its own trading platform early next year after conducting several industry-wide seminars in an attempt to model a marketplace that will be accessible to all.

"We want to work with the industry to develop something the industry actually wants," says CEO Steve Marks.

Although some may be wary of embracing online ventures in the aftermath of the dot.com bust, Marks says there are benefits to be had within the trading process.

"You have to pitch yourself at the right level, approach people who have an understanding of the whole supply chain and who can see the benefits," he said.

Even the collapse of EnronOnline -- the trading platform of bankrupt parent Enron -- has not slowed these firms, they say.

EnronOnline was a controversial, but initially successful, platform in which the energy trader was on one side of each deal -- a formula that industry executives now say will be shunned and anyway would have been difficult to adapt to the illiquid and non-standard physical oil market.

The Intercontinental Exchange (ICE), which this year bought London's premier oil futures exchange, is another leading online market place that has concentrated on financial instruments and has not made inroads in physical oil markets.

Big stakes
Despite seemingly disappointing results from the first round of online ventures, companies continue to plough ahead -- playing for potentially enormous stakes.

Physical oil trade may be as much as double daily crude oil production of 75 million barrels, thanks to sales and resales of crude oil and refined products, says the CEO of Pepex, one of the very first online marketplaces for physical oil.

"We think that about 15 to 20 percent of the (physical oil) market will be online in two years. That's about 30 million barrels per day," says Boris Marchegiani, whose company hopes soon to branch out from its focus on trade in the Americas.

The volume of tender sales and purchases alone -- a function ideally suited to an Internet-based platform -- could be as much as 20 million barrels per day, he says.

Pepex, in business for over two years, prides itself on its ability to trade different grades, products and specifications.

But the hurdles are similarly huge, as most physical oil traders depend on the telephone -- and person-to-person negotiations -- to conclude their complex business.

"The physical oil market is very complicated, online platforms do not come off the shelf," says Marchegiani.

In the shadowy market, many traders use subterfuge, misdirection and deception to position themselves better and maximise profits on expensive positions. Internet-based platforms threaten to turn a harsh light on the market.

For some, this may be its attraction.

Small and medium-size oil producers and refiners, for instance, have been among the first to take advantage of the technology as they see better success through a transparent platform than going head-to-head with experienced traders.

Pioneers pass on technology
Although some pioneers like Pepex maintain a firm belief in the growth of the online business, a number of early starters have all but given up on carving out a substantial niche and instead are harnessing their experience -- passing on their technology to the next breed of online entrepreneurs.

HoustonStreet, for instance, still operates an Internet platform but made the shift this summer -- after two years in the business -- to selling its software to others.

RedMeteor, another pioneer in online oil trade, retains its Internet presence -- with the support of telephone brokers -- but has licensed out its proprietary software to a Russian energy platform and hopes to do more of the same.

Neftebid, using the RedMeteor system, launched in Septmeber an online exchange geared toward oil product exports from Baltic Sea ports. It is supported by Russia's sixth largest oil producer, Sibneft.

In addition to the early leaders, a number of other start-ups focused on U.S. crude and oil product trade, but none have made the kind of inroads necessary to substantially alter the market.

In fact, one of the oil trader's most-used Internet tools is not in the least geared toward oil or trading.

Created to allow two or more people to "chat" socially in real-time online, Yahoo!'s Instant Messenger is widespread as a communications tool -- albeit an insecure one -- in the physical oil market, often as a substitute to long-distance calls.