How the world’s biggest oil trader makes his billions – Vitol Group. Part 2

Vitol has not had a single loss-making year in its half-century history (the company will celebrate its 50th anniversary in August). According to Bloomberg Markets, its profits have risen from $22.9m in 1995 to a record $2.28bn in 2009. At its peak, Vitol’s return on equity was an unthinkable 56%. Even Wall Street pales next to such success: Goldman Sachs’ peak return on equity since its IPO in 1999 was 31%. Jean-François Lambert, who worked extensively with the company as head of global commodity markets and structured trade finance at HSBC, says: “Vitol has established itself as an energy trader at its most extreme.

Journalists traced the history of Vitol’s successes – and its rare but high-profile mistakes – by interviewing more than twenty current and former oil industry executives and experts, and analysing hundreds of pages of previously unreported financial and legal records of the company in the Netherlands, the US and Luxembourg. Vitol, through which some 6.5 per cent of the world’s oil reserves pass, is battling stiff competition. It has to compete with other private companies such as Glencore, Trafigura Group, Mercuria Energy Group, Gunvor Group and Castleton Commodities International. It also competes for market share with the largest public oil traders, including BP, Royal Dutch Shell and Total, and, increasingly, Chinese state-owned oil companies.

Taylor became an oil trader almost by accident. Scottish by birth, he grew up and was educated in England and joined Shell for one simple reason: it paid better. Since 1978 he had been an oil trader in Singapore and Caracas where he met his wife. Vitol under Taylor grew at the speed of a Silicon Valley start-up. He joined the company in 1985 and ten years later took over, transforming Vitol into one of the world’s leading traders, driven by growing demand for oil from China and other emerging markets.

During his tenure as CEO, Vitol’s shareholder value has risen by 3,500%, from $278m in 1996 to almost $10bn last year. During the same time, Glencore has increased its capitalisation from $1.2 billion to $35 billion, or 2,800% – also impressive, but still not as rapid growth. Initially, the ambitions of Vitol’s founders were much more modest. In August 1966, two Dutchmen, Henk Vietor and Jacques Dettinger, invested 10,000 Dutch guilders (around 2,800 dollars at the time) and founded a company in Rotterdam to buy and sell oil products that were transported up and down the Rhine on barges.

The entrepreneurs were given the money by Viehtor’s father at an annual interest rate of 8 per cent. Dettinger, now 81, recalls that Viehtor’s father told him: “You have six months. If it doesn’t work out, we say goodbye”. In the beginning, the founders made only a small profit and the book value of the company was 200,000 guilders, including the value of the two Viehtor and Dettinger cars. But during the late 1960s and ’70s, the major producers who controlled the long-term contracts began to collapse and small companies, including Vitol, were allowed to buy and sell oil on the nascent spot market. Business picked up. “It was difficult”, says Dettinger, recalling “very dangerous” moments such as the first oil crisis in 1973-74, when oil prices changed dramatically and unpredictably. Back then, the energy market had no futures, options or swaps to hedge prices, so Vitol took a huge risk with every purchase: they risked losing everything if they predicted the market would go wrong. But business grew and Vitol expanded, opening offices in Switzerland, London and New York.

Strategic differences soon emerged between the founders. In 1976, Viëtor, who had been CEO, left the company and the post was taken over by Dettinger. By the time Taylor joined the company, about 450,000 barrels a day were passing through Vitol – not insignificant, but half as many as industry leaders. The oil-trading market was then dominated by Phibro, which had just bought investment bank Salomon Brothers for $550 million, Marc Rich + Co. founded by a trader with a history of tax evasion, and Transworld Oil, whose head John Deuss made his name and reputation as a scoundrel by trading with South Africa under apartheid.