Category: Insights

Xpansiv valuing sustainability

Xpansiv is set to launch its unique commodities data platform in the second quarter of this year. We caught up with VP Business Development Keith Guerrini to learn more.

The environmental impacts associated with the production of commodities have been in the spotlight in recent years, and forward-looking producers have been working on ways to provide consumers with the level of transparency they increasingly demand. The Xpansiv Platform will allow producers to differentiate their production in terms of sustainability features and to monetise their responsible behaviour.

HCWhat problem is Xpansiv the solution to?

Keith Guerrini (KG): Xpansiv is the solution to the fact that commodities trade in a market where products in the same asset class are indistinguishable from one another. The issue with this is that in almost every case methods of production across the same commodity group differ in impact. For instance, some are produced in situations high in greenhouse-gas emissions, and others are produced in a more responsible manner. What we figured out is that in cases where there aren’t government-enforced compliance markets for methods of production there is still tremendous pressure from consumers and investors for supply chains to be cleaned up. But there’s no mechanism through which the market can prove that it’s purchasing differentiated commodities. Our solution is to digitise commodity production to allow producers to differentiate their outputs – whether oil or gas or agricultural products – based on their sustainability attributes.

HCWhat is Digital Feedstock and how does it work?

KG: The Xpansiv Platform collects primary and secondary data from commodity production sources and converts it into a data format we call Digital Feedstock™. It includes the physical characteristics of the commodity, but also the qualitative aspects of production. In the case of a barrel of crude, for example, the Digital Feedstock includes physical attributes like gravity and sulfur content, but it also includes factors such as whether or not the crude was produced from a well that was fracked or flaring gas. Once we have codified the commodity’s digital representation, it’s more than ‘information’ that can be communicated to the market – it’s a tradable asset. The Digital Feedstock is stored on the Xpansiv Platform (essentially a ledger) and can be traded between counterparties. The most direct way of trading Digital Feedstock is through Xpansiv’s relationship with CBL Markets, which is a leading commodity spot exchange primarily trading environmental products such as RECs or Australian water rights. And in fact, we recently announced that we’re merging with CBL, to create the world’s first data driven commodity exchange.  Following the completion of the merger, the first product we will offer is the IES TrustWell Gold or Platinum certification for responsible natural gas production. This enables producers to sell salient attributes in order to monetise responsible production.

HCWhere did the idea for Xpansiv come from?

KG: The Xpansiv founders have backgrounds in the carbon-offset market. Early on, they recognised problematic issues in global environmental markets. The first is that it’s hard to harmonise a global carbon price. There are multiple compliance and voluntary regimes, and comparing one form of offset or renewable attribute with another is challenging – despite global participants being increasingly eager to address climate-change efforts. They realised that data is the missing link – more information is the key to helping markets mature and harmonise. Blockchain technology was emerging as a potential way to harness all of that information and transact carbon from one regime to another. That led to our current model – capturing production information directly from the source so that sustainability attributes can be captured, analysed and ultimately transacted. The founders recognised that beyond basic sustainability features there is a huge dearth of high-resolution, high-integrity information about commodity production. The information was there, but it wasn’t being harnessed. They saw that it could be harvested and used by producers to monetise their responsible practices, while simultaneously giving consumers more clarity about what they’re buying. The system rewards sustainable production practices, offering a clear path to a carbon-friendly future.

HC: What is Xpansiv’s development plan?

KG: After our merger with CBL Markets, the combined entity will be called Xpansiv CBL Holding Group, or XCHG for short. We’re very excited about the potential to create a straight path from production data to exchange traded products.  And to that end, we’ll soon be rolling out our first certification products, then expanding our offering to deliver what the market demands in terms of transactable attributes. From initial conversations with market participants, we see demand for low-methane-emission oil and gas, flare-free oil and frack-free gas. We also see markets for responsible water use in agricultural production as an enormous opportunity. All of which plug directly into the existing CBL Markets platform quite neatly.  Beyond environmental attributes, we see potential for the Xpansiv Platform to be used for trading physical volumes, attaching quantitative production metrics to Digital Feedstock as a way of bringing analogue markets to a much finer degree of digital insight. At the core, we’re digitising global commodities.

HCI: How will Digital Feedstock be traded?

KG: It will initially be traded in a manner very similar to current environmental markets. The market structure will be the trading of production attributes. In the same way a REC is the attribute of renewable power generation, Digital Feedstock for low-fugitive-methane natural gas, for example, will be traded as an asset that the buyer can use to claim sustainability in its supply chain. Digital Feedstock can be used to trace units of production all the way through a physical supply chain, from source to market. Volumes will be tracked from production through processing, transportation, storage, refinement and consumption. It’s a full-life-cycle capture that gives a full understanding of provenance.

HCHow will producers benefit from using Xpansiv?

KG: There are a couple of answers to that question. The first is that Xpansiv can provide producers that have invested in becoming top-of-class operators in terms of responsibility with a mechanism that enables them to recover capital through higher prices – they’ll be able to sell responsibility attributes to meet rising demand. The second answer is that producers are facing tremendous pressure from investors, employees and consumers to prove that they’re behaving in a responsible manner. Many of them have made hard commitments, but they lack a high-integrity way of verifying their actions. The Xpansiv Platform offers that much-needed transparency, proving their commitments while providing a clear path to monetising those efforts. We get asked a lot why producers would give us their primary data. In addition to the points I just mentioned, it’s also because information is becoming much more available because of monitoring technologies used by data vendors. This raises the question of whether producers want to get out in front and provide (and control) their own data or let third-party sources come in and tell their story for them.

HCHow will source data be used five years from now?

KG: Information about almost every physical activity related to commodities is going to make its way to the markets, in one form or another. This doesn’t mean there won’t be proprietary, confidential information that rests with producers. It means that information about sustainability attributes will be a mandatory market demand. Commodity sector consumers, investors and employees will know that the information is there and will demand access to it. Commodities as homogenous asset groups will no longer exist. Each unit – whether it’s a barrel of oil, an mcf of gas or a bushel of grain – will have the potential to be a branded product based on where it comes from, how it’s produced and how it’s processed and stored. This sounds like a totally different world, but data is going to make it happen. And soon.

Keith Guerrini manages Xpansiv’s strategic initiatives and relationships in the energy sector and financial markets. Before joining Xpansiv, he was Director of Structured Products Origination in Citigroup’s commodities business, responsible for providing risk management and working capital solutions to E&P, midstream, LNG and refining clients. He has also been a Director in Deutsche Bank’s commodities business and a market maker on the Chicago Board Options Exchange.