Two years ago, Denver-based oil and gas driller Bonanza Creek Energy (BCEI.N) wanted to spread its credit risk and hedge its production - and it called on some regional Main Street banks to help do it.

It ended up with a group of banks, including several names little-known in commodity circles until recently. Ohio-based KeyCorp (KEY.N) led the lenders and was also among the banks providing hedging.

Traditionally, Wall Street's big banks were the go-to providers of such services, but since the financial crisis and the introduction of tougher regulations, they have been pulling back.

At the same time, regional banks, more used to serving consumers and small and medium-sized businesses in the communities they serve, have been growing their energy and commodity lending and hedging businesses. Soaring U.S. oil and gas production resulting from the use of fracking technology in states such as North Dakota has encouraged the regional banks.

"In the past, you didn't have those banks in there and they are definitely beginning to fill the void left by some of the big guys that are beginning to pull in some of their tentacles," said Bill Cassidy, Bonanza Creek's chief financial officer. "The more competition you have, the better it is for someone like myself," he added.

The measured expansion of these regional banks, which has not been previously reported, highlights the emergence of new competition in the commodities markets. Other new rivals offering to lend and hedge include Australian bank Macquarie (MQG.AX) to the risk management arms of agribusiness giant Cargill and oil major BP (BP.L).

Last year, the top ten regional banks active in the space together held an average of $23 billion in commodity derivatives contracts on their books, up nearly 50 percent from their holdings in 2009, according to a Reuters analysis of quarterly regulatory data from Thomson Reuters Bank Insight.

This is still miniscule relative to the $3.9 trillion in commodity derivatives that the top six Wall Street banks still controlled, according to the data, though that sum has barely risen over four years.

Bonanza Creek, which drills for oil and gas in Colorado and Arkansas, has a credit line with the KeyCorp-led group of 10 banks, which also include Wall Street giants JPMorgan Chase & Co (JPM.N) and Wells Fargo (WFC.N), as well as other regional institutions such as IBERIABANK Corp. (IBKC.O) and Cadence Bank CMMBRB.UL. It has hedging arrangements with five banks.

Even modest inroads can be meaningful for regional banks expanding in the sector, as it allows them to "pop out and create some incremental revenue growth," said Marty Mosby, banking analyst at Guggenheim Partners.

Indeed, the proportion of KeyCorp's new derivatives business that is commodities-related is now about 25 percent, up from nothing in 2006 when the business started, said Matthew Milcetich, its head of derivatives

"It is a meaningful percentage of our new business volumes," he said.

CHIPPING AWAY

New techniques for drilling wells have made it possible to extract more crude and natural gas from shale formations in North Dakota, Texas, Pennsylvania and a handful of other energy-rich states.

The boom has also fed the need for more loans and risk management for energy producers, who use derivatives to protect themselves from swings in commodity prices.

As of December 2013, 24 banks reported having at least some commodity derivatives exposure on their books, according to the Reuters analysis of "commodity and other" derivatives holdings reported to the Federal Reserve by bank holding companies.

Of those 24, seven are global megabanks, such as Morgan Stanley (MS.N) and Goldman Sachs (GS.N). The rest range from Midwest regional banks to the domestic arms of Israeli and Dutch groups.

The list isn't exhaustive, as it excludes some foreign banks that are not subject to Fed supervision, like Sydney-based Macquarie, and some smaller banks don't file holding company data.

The only regional bank on the list that was active a decade ago is BOK Financial Corp. (BOKF.O), parent company of the Bank of Oklahoma, long known as "the oil bank of America" thanks to its roots in the state's oil industry.

"We live, eat and breathe this business, and we've been doing it since 1910," said Bob Lehman, senior vice president at Bank of Oklahoma.

BOKF offers a "high-touch service" that attracts many small oil producers, who want something "much more relationship-driven than one of the Wall Street banks, where they'll just be another number," he said. Nine of the 50 employees in its energy division are petroleum engineers, he added.

Still, even BOKF's commodities derivatives book - $2.7 billion at the end of 2013 - is tiny next to a rival like Morgan Stanley (MS.N), which reported $545 billion.

Other companies are growing in the sector through their lending businesses.

Fifth Third Bancorp (FITB.O), another Ohio bank, began building up a team to provide commodities hedging services in 2006, but expanded into energy lending in 2012 by hiring seven bankers from Lloyds Banking Group (LLOY.L), a British bank which was refocusing its strategy around UK-linked clients.

"Energy's been on the drawing board for the last eight or nine years," said Kevin Lavender, Fifth Third's managing director of corporate banking.

Today, Fifth Third's energy banking team manages $2 billion in capital commitments across all segments of the energy sector, according to energy banking group head Richard Butler.

LET'S NOT GET PHYSICAL?

Like KeyCorp and BOKF, Fifth Third does not trade physical commodities, relying on purely financial commodities trading for its hedging services.

That doesn't bother folks like Jim Finley, who runs an eponymous Texas-based oil and gas company that has a $500 million credit facility with eight, mostly regional banks, including Fifth Third.

"We have never traded physicals with any bank," he said. "Regionals know the space really well."

The ability to deal in barrels of crude oil or piped natural gas was once a big selling point for Wall Street's giants. But several major banks, including JPMorgan, have announced they are quitting the business due to sliding margins, and tougher regulation, including from the Federal Reserve.

Wall Street rivals have often run physical trading desks or owned storage terminals, warehouses and other infrastructure assets. These businesses are supposed to help them gain market heft and intelligence that help them trade profitably and provide other kinds of services to customers. But if the little guys can provide the same services without running such empires, they could start to change the structure of the business.

Wall Street banks, including Goldman Sachs, and some consumers of commodities have warned that limiting banks' ability to take or make delivery of raw materials would make it harder for them to properly serve their clients.

For example, the treasurer of oil refiner PBF Energy (PBF.N), John Luke, recently wrote a comment letter to the Fed claiming that limiting banks' ability to trade in physical commodity markets would "make it very difficult for end-users of physical commodities to efficiently transact in these markets and effectuate hedging strategies."

The question is whether such physical trading is an absolute requirement - or simply a way to maximize earnings from such deals.

"There is a pocket of smaller financial institutions who are clearly providing their clients these types of services and yet they are not playing big in the physical market," said Saule Omarova, a law professor at the University of North Carolina at Chapel Hill.