Shell, BP Agree Quality Premium for North Sea Brent Crude

Royal Dutch Shell Plc and BP Plc have agreed to new contract terms that will require buyers to pay a premium for benchmark North Sea oil grades with different qualities sold in the Brent Blend forward market.

The price of Brent, Ekofisk and Oseberg oil sold under 25- day forward contracts will be adjusted by a “quality premium” based on their price difference relative to the Forties grade, Shell said in an amendment to its so-called SUKO 90 contract terms and conditions published on Feb. 8. The new rules came into effect today and apply to cargoes for May delivery onwards, according to the notice. Shell’s contract wording has since 1990 acted as an industry standard for buyers and sellers of North Sea Brent Blend crude.

“The new robust and transparent Quality Premium mechanism will support the Brent benchmark by allowing for more crude grades and cargoes to be used in establishing the underlying market price,” Jonathan French, a Shell spokesman based in London, said in an e-mailed statement. “It will therefore contribute toward higher liquidity and better price discovery.”

Sellers of BFOE forward contracts may deliver Brent, Forties, Oseberg or Ekofisk crude cargoes. Under the new rules, buyers of Brent, Ekofisk or Oseberg, will be obligated to pay a premium to account for those three grades’ superior quality, according to Shell.

De-Escalator

A separate clause already exists for the Forties grade, which gives buyers a discount for that crude which has a higher sulfur content, depending on a scale known as a de-escalator. The cheapest of the four grades, usually Forties, sets Dated Brent, a benchmark used to price more than half of the world’s oil.

“We believe these changes will improve the effectiveness of the Brent contract as an international price benchmark,” Robert Wine, a BP spokesman in London, said by phone today.

Platts, an energy pricing and news agency owned by McGraw- Hill Cos., said it won’t use the quality premium in Shell’s contract in Platts’ own BFOE assessment for now. The company publishes prices that are used as industry benchmarks.

“While the industry may be exploring alternative concepts, including the possible introduction of escalator mechanisms within BFOE, Platts’ assessments shall not reflect escalators until a formal methodology change has been proposed, announced, and reviewed with all interested stakeholders, and formally implemented,” it said in a Feb. 8 note to subscribers.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net; Lananh Nguyen in London at lnguyen35@bloomberg.net

To contact the editors responsible for this story: Stephen Voss at sev@bloomberg.net; Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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