Executives at the US oil giants often look down on their European rivals. Although the biggest names in ExxonMobil (XOM.US) and Chevron (CVX.US) may not say it publicly, they will think that the company they run is superior. However, there is one business that Europeans control and that Americans are very envious of — oil and gas trading.

The Zhitong Finance App learned that last month,$Exxon Mobil (XOM.US)$It said it is creating a global trading division to compete more intensely with companies such as British Petroleum (BP.US) and Shell (SHEL.US) in the high-risk, high-return energy derivatives sector.

European giants Shell, Total (TTE.US), and British Petroleum are famous for their oil fields, refineries, and gas stations. But all three companies also have trading divisions similar to Wall Street, holding speculative positions on oil, gas, and electricity prices, earning billions of dollars each year in much the same way hedge funds generate profits.

ExxonMobil and Chevron have been reluctant to start a business in the trading sector for many years, but now they want a share of the pie, it's easy to understand: trading has become a lucrative business.

Shell, BP, and Total are keeping the exact results of their deals secret. However, according to simple data released by British Petroleum, it is possible to roughly estimate how much money the company has made, and this result is astonishing.

In February of this year, BP told shareholders that in the past three years, the trading business had increased its annual return on capital by an average of 4 percentage points. This means that, based on the adjusted average capital used by BP from 2020 to 2022 of 111 billion US dollars per year, and assuming that BP's trading profit was 4%, the company earned almost 4.5 billion US dollars a year, making a total of 13.5 billion US dollars over three years. By contrast, in the past three years, BP's adjusted profit was $34.7 billion, which indicates that the trading business may have contributed nearly 40% of the total.

Can ExxonMobil and Chevron replicate this performance?

Once upon a time, the US also had powerful oil trading companies, namely Mobil and Texaco. However, in the merger of oil giants in the late 1990s and early 21st century, Mobil was acquired by ExxonMobil, and Texaco was incorporated into Chevron. The buyers' non-transactional culture prevailed.

Currently, both ExxonMobil and Chevron are doing some deals, but they are basically plain deals to balance supply and demand in their core business. Both companies are increasingly trying to enter more aggressive and speculative trading areas favored and dominated by Europeans. ExxonMobil announced last month that it will establish this global trading division called Global Trading to focus on “increasing commercial strength and ultimately providing industry-leading trading performance”, indicating that ExxonMobil has made a difference. Although Chevron is moving in the same direction, its pace of development has been slow.

However, both US companies are facing huge hurdles.

First, it's unclear whether senior management — and their respective boards — would actually be willing to accept such a risky but potentially very rewarding business. ExxonMobil's experience over the past five years shows that they are unwilling to accept it. The company advanced trading business several times in the past, but then quickly withdrew. Nonetheless, ExxonMobil showed that it recognized the scale of the challenge by creating a new division to house all the different trading operations.

Second, Exxon and Chevron will struggle to attract the best talent. At British Petroleum, a group of selected traders pay more and more bonuses each year than the company's CEO. It's hard to imagine this happening to these two American companies. Even ordinary European traders can get impressive bonuses — far higher than engineers managing oil fields or refineries at ExxonMobil and Chevron. However, some headhunters said that ExxonMobil seems to have finally understood that it needs to pay higher salaries to the best talents.

Third, trading can be very profitable, but it's also expensive. Commodity traders need to set aside cash to open positions, which consumes quite a bit of working capital. Sometimes, this can strain the balance sheet and reduce free cash flow. Shell, which has a capital-intensive liquefied natural gas trading division, found that this could be a problem because its traders used up capital before profits arrived. This mismatch has caused balance sheet fluctuations, and Shell has been struggling to explain this to shareholders.

Is this worth the effort? Judging from the profitability of BP, the answer should be yes. But there's a reason Europeans rarely talk about their trading sector: shareholders give them very low price-earnings ratios. Ironically, for the oil giant, the deal is the best kept secret business.

Both ExxonMobil and Chevron have a culture of minimising risk rather than embracing it. Whether executives, board members — and eventual shareholders — will be willing to let a hedge fund-like division into their business remains to be seen.