* Dearth of M&A activity creates opportunities
* Traders seen as "selective" in choice of assets
* Investment a way to lock up long-term supplies
By Emma Farge
GENEVA, Sept 25 (Reuters) - Swiss oil trading houses areinvesting tens of millions of dollars in oil assets, morphingfrom middle men to producers, as they look to swoop on cheapassets during a period of depressed M&A activity.
With oil trading profit margins often as low as 1 percent,traders are seeking to diversify, especially in Africa whereVitol and Glencore are already pumping oil.
"Most other natural buyers are not focused on M&A at themoment as they are focused on exploration, creatingopportunities for trading houses to get even further up thevalue chain," said Oswald Clint, a senior research analyst atBernstein.
Based on data for the first nine months of 2013, energyanalysis group Wood Mackenzie estimates that M&A activity in theoil and gas upstream sector this year could be the lowest since2004.
Geneva's Mercuria last month bought a minority stake inSeplat, an independent Nigerian producer which has three oilblocs in the Niger Delta, for around $60 million, according to astatement from the seller MPI.
Gunvor also made its first big foray into oil exploration inJune by agreeing to buy the bulk of the $136 million rightsissue by Swedish oil firm PA Resources which has projects in theNorth Sea, Tunisia, Republic of Congo and Equatorial Guinea,among other places. This leaves Gunvor with a 49.9 percentnon-controlling stake.
The latest purchases come at a time where many traders areawash with liquidity, after successfully tapping debt marketsfor the first time.
Their prime targets are often minority stakes in producersor, in the case of a recent bid by Vitol for Sterling Resources, a full takeover following a steep decline in the firm'sshare price. Vitol later withdrew its plans.
Oil traders holding stakes in producers could stand to gaina lot if Brent prices hold near current levels of $110 a barrel,potentially dwarfing the profits they could expect from trading.
Wood Mackenzie's Luke Parker said that trading houses couldexpect a return of over 10 percent if oil prices outperform the$85-$90 a barrel level - taken as the price assumption for company valuations.
PURSUIT OF SCALE
Over the last few years, large oil traders have accumulatedassets across their businesses as they seek vertical integrationand greater control of supply chains.
Last year for example, Vitol and Gunvor both bought Europeanrefineries from insolvent Petroplus.
Investment in upstream assets is partly about emulatingasset-rich Glencore, which began pumping oil in late 2011through a stake in an oilfield in Equatorial Guinea althoughVitol opened its exploration and production unit in 2004.
"Some have attempted to replicate Glencore's model. It's theambition of becoming an integrated oil and gas actor," saidEcobank's head of energy research Rolake Akinkugbe.
Pumping oil themselves is also a way for traders to securelong-term access to defend market share against both theirdirect competitors and expanding state oil firms, such asAzerbaijan's SOCAR.
The risk for them is that increasingly active state oilfirms, marketing directly to consumers, shrinks the size of theso-called "tradable market", defined as volumes which are notdistributed directly by producers to consumers.
"There are pressures as the world is being carved up,meaning that in order to play the game trading houses have tolook to make investments," said Robert Piller, commoditieslecturer at the Geneva Business School.
"It is about accessing commodities," he added.
Even in Africa, traditionally a region where traders enjoyplentiful access to government oil exports, some state oil firmssuch as Gabon's GOC have expressed an interest in marketingtheir oil directly.
"National oil companies...are increasing their marketing andtrading activities so there's less of a market for off-takecontracts," said Roland Rechtsteiner, managing partner at OliverWyman.
"Sometimes they can only access new flows throughsignificant investment."
"SELECTIVE OPPORTUNITIES"
So far most investments have mostly been carefully selectedniche opportunities, often with the traders in the role ofminority stakeholder rather than operators.
In the most recent example, this week Mercuria bought a $50million stake in Romanian gas producer Amromco Energy.
"Traders will never play any significant role, or any rolewhatsoever, in massive exploration such as arctic drilling,"said Gunvor's Chief Executive Torbjorn Tornqvist at an FT eventearlier this year.
"(But) Maybe they could make a difference there in financingthe operation, in taking risks which the bigger companies cannotor will not do. I think trading houses are looking at thoseselective opportunities in upstream."
In some areas, such as onshore Nigeria, large companies likeRoyal Dutch Shell and Chevron have sought to scaleback, creating opportunities for new investors.
But some say traders' interest in production could beshort-lived and might fade if the Brent price falls again,making it harder to break even on oil projects.
"If the oil price reverses they might be sellers," said Duncan Clarke, head of African oil experts Global Pacific &Partners.
"This is not meat and potatoes for them. It's more like thegravy."