Shell Chemical Co. has become the first major petrochemical firm to enter the risk management market by creating Shell Chemical Risk Management Co. (Scrim).
``When you talk to people in the industry, resin price volatility is either the first or second thing they talk about,'' Scrim President Gene Kenyon said. ``This venture is an opportunity for us to give plastics customers a way to manage a business they spend a lot of time worrying about without being able to do much about it.''
Kenyon, a 28-year Shell veteran, and Scrim Vice President Jack Perini, who has been with Shell for 18 years, spoke in an Aug. 5 telephone interview from the venture's Houston office.
Risk management contracts, which are common in the oil, natural gas, agricultural and financial markets, are designed to protect buyers and sellers from extreme price movements. The contracts allow buyers and sellers to lock into a price ceiling or floor, with the risk manangement company paying out the difference if prices exceed or fall short of that target figure.
The risk management company profits from managing a portfolio of financial contracts based on dealings with producers and buyers.
Two firms — the Louis Dreyfus Energy Corp. of Wilton, Conn., and Enron Corp. of Houston — have introduced resin risk management programs in the last year.
But Shell's entry is somewhat different because the company has a physical presence in the industry as a producer of PET bottle resin and such plastic feedstocks as ethylene.
Both Kenyon and Perini were quick to point out Scrim's forward pricing is not limited to Shell products, but will apply to all resins in the petrochemical industry. But Shell's status and 65-plus-year history in the field will help Scrim establish itself, according to Perini.
``We've got a little different motivation in that Shell has $5 billion in underlying capital assets in the chemical industry,'' Perini said. ``If [petrochemicals] don't turn out to be a good commodity, we can't move on to the next one. This is our home.''
Kenyon added Shell's knowledge of the industry will allow Scrim to customize solutions better for its customers, such as a recent contact whose buying volume varied by season, making a fixed price for an entire year impractical.
Scrim officials believe risk management can help companies grow by creating a more stable financial picture.
``A lot of times uncertainty hampers the growth a customer sees,'' Kenyon said. ``They worry about beating up a supplier or customer and that's not helping the industry grow.''
Kenyon said an encounter he had at the NPE 1997 trade show in Chicago in June proved the connection between risk management and growth opportunities.
``I was talking with a midsized injection molder who had brought his banker to the show with him,'' Kenyon said. ``The banker caught on right away that if his client used these services he could afford the machinery he was looking at at the show by getting a bank loan based on locking in his resin price.''
Officials at Enron and Louis Dreyfus, Scrim's primary competitors in the field, said Shell's move makes petrochemical forward pricing more credible.
``Some companies want to live and die by the commodity sword, while others have a different approach,'' said Tim O'Neal, a director in capital and trade resources for Enron. ``This will bring liquidity to the market. People like to shop around and get the best price.''
Tim Stuart, vice president of natural gas liquids and petrochemicals for Louis Dreyfus, said Shell was taking advantage of a good opportunity by launching Scrim.
``Shell has seen these commodities evolve in natural gas and petroleum,'' Stuart said. ``This wasn't a surprise.''
Scrim currently has a five-member staff, but that number is expected to increase to 20 in the next year, officials said.