(EnergyAsia, March 10, Monday) — China Aviation Oil (Singapore) Corporation Ltd (CAO) has unveiled its strategy for further growth and expansion of its existing business.

Chairman Lim Jit Poh said: “CAO’s strategy sets out the developmental direction for CAO which will complement its current business model of deriving income from jet fuel procurement. CAO will take additional calculated risks to sustain its growth objectives and create the capabilities it needs to compete in the future.”

Following the completion of restructuring in March 2006, its board decided that CAO should position itself as a leading international oil trading company and the three core business components associated with it shall be: jet fuel supply, trading of relevant oil products, and investments in synergetic assets to enhance its trading activities.

The first pillar of jet fuel supply has been in existence before and after the restructuring.

Singapore-listed CAO currently supplies more than 90% of China’s jet fuel imports. The company also holds investments in oil-related assets like Shanghai Pudong International Airport Aviation Fuel Supply Company Ltd and China Aviation Oil Xinyuan Petrochemicals Co Ltd.

CAO had suspended the trading of oil products and derivative contracts since the announcement of substantial losses from speculative derivative contracts trading on November 30, 2004.

CAO said it will transform its existing jet fuel procurement model into a jet fuel supply optimisation model complemented by trading activities to capitalise on its competitive advantages. It will enhance its capabilities to offer value-added services to customers and eventually seek to extend its competitive advantages beyond the China supply chain.

This is to develop trading capabilities for CAO to maintain its current leading position in China’s jet fuel import market in the event of deregulation.

This year, CAO said a key priority will be to develop a jet fuel supply optimisation model, which will enhance its offers to customers and support its own growth.

To diversify products and geographies, CAO will gradually commence trading of other oil products and petrochemicals within its means and resources. CAO will adopt a business model where trading complements supply activities.

CAO will also seek to access synergetic oil-related assets, such as storage and logistics assets to complement its jet fuel supply business and trading of other oil-related products.

As part of its strategy implementation, CAO aims to gradually commence trading of other oil products this year within its means and resources. The company has pledged not to “engage in speculative options trading.”

To prepare for the start of trading, its board and management have systematically identified the risks related to trading over the past year. Measures have been implemented to assess, mitigate and manage these risks.

CAO said its strategic investor, BP, has provided unstinting support and assistance during this process.
The company has invested about US$1 million to install the hardware and software for trading.

CAO said it implemented Allegro’s Energy Trading and Risk Management (ETRM) system, an application widely used by global energy companies to manage trading and supply activities and their related risks.

New server systems were purchased to run the ETRM application. CAO will run daily mark-to-market reports from the ETRM system, which will be monitored by the risk management department and reported to the management.

CAO said its independent directors and China National Aviation Fuel Group Corporation (CNAF) nominee directors have undergone training and briefing sessions conducted by BP to ensure that all directors have a good understanding of the trading business.

Clearly defined trading risk limits have been set and approved by the Risk Management Committee (RMC), a board committee of CAO, to ensure that the risk appetite is commensurate with the financial resources and trading capabilities of CAO.

The risk management department, which has a second direct reporting line to the RMC, monitors these limits on a daily basis to ensure that they are adhered to.

The RMC has also approved the products or instruments to be traded by CAO and the key measures to assess, mitigate and manage risks related to trading activities.

Zhang Zhenqi, CAO’s executive director and general manager, said:

“The board and its risk management committee have undertaken thorough reviews to ensure that adequate corporate governance and risk control measures are in place for CAO to commence trading, and that the board and the management fully understand the risks involved. We will grow this business cautiously and meaningfully within our means and resources.”