Platts and Shell seek support for competing Brent crude reforms

Oil major Shell and New York-based price reporting agency Platts are attempting to win support for rival plans to amend the pricing mechanisms used in North Sea oil trading, in an effort to address concerns that market distortions have tainted the value of Brent as a global benchmark.

Although details of the two plans differ, both are designed to allow a broader range of crude oil grades to be delivered into the forward market for BFOE crude oil – the market that underpins Ice Brent futures, the world’s most heavily traded oil futures contract. Whichever plan is ultimately adopted, the result will be a boost to the liquidity of the physical base for Brent futures and other derivatives, analysts say.

“We’ve seen Brent evolve over the last 10 to 15 years, in a similar manner, and this move is very much in line with that trend,” says Miswin Mahesh, a London-based oil analyst at Barclays. “For Brent to maintain itself as a global benchmark, it requires such changes.”

The Brent benchmark is based on four North Sea crude oil streams – Brent, Forties, Oseberg and Ekofisk – with the cheapest of the four blends setting the price of the basket. That is usually Forties, which has set the price of Brent more than 98% of the time since 2011, according to Platts data.

This has made Brent and its derivatives vulnerable to distortions caused by issues affecting Forties, such as outages of the Buzzard oil platform off Scotland’s east coast. Buzzard supplies the biggest share of Forties – and its role in helping to set the price of Brent has also generated worries about the takeover of Canadian oil firm Nexen, which owns the largest stake in the platform, by the state-owned China National Offshore Oil Corporation. The two firms announced the acquisition had been completed on February 25.

Due to the impact of lower-quality Forties crude on the Brent benchmark, Platts began applying a so-called price de-escalator in 2007, which compensates buyers for oil with a higher sulphur content. While Forties is the most frequently delivered crude in the forward BFOE market, sellers of Brent, Oseberg and Ekofisk tend to withhold their cargoes because they can get better prices elsewhere. Platts’s recent proposals would build on this by introducing price escalators for higher-quality crudes, ensuring these blends receive a premium relative to the overall benchmark. The idea is to encourage sellers to deliver cargoes of crudes other than Forties into the market.

“The changes will make sure that it’s not only Forties that gets a big say in influencing the price of the BFOE basket,” says Mahesh.

However, just 10 days before Platts was due to unveil its proposals, Shell surprised the market by announcing changes to its Suko 90 contract – the standard contract used in the forward BFOE market – on February 8. Market sources interpret Shell’s move as an effort to seize the initiative from Platts and promote its own view of Brent reform. The most notable difference between the two plans is that Platts is seeking to introduce price escalators for Osberg and Ekofisk, whereas Shell is seeking to introduce a “quality premium” for all three non-Forties crudes. The two proposals also use different formulas to calculate the premiums buyers would receive.

Shell and Platts say they are sorting out their differences. “We believe our proposals address the need to improve the robustness of the BFOE forward market and look forward to continued dialogue with Platts on this issue,” says a London-based spokesman for Shell.

Many market observers believe the two sides will soon settle on one standard. “Ultimately, the two proposals are not that different from each other,” says David Wech, managing director at Vienna-based research firm JBC Energy. “We wouldn’t be surprised to see a unified accord coming up over the next couple of weeks.”

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