By the time Jorge Montepeque came to London in January 2002 to revamp Platts energy-price benchmarks amid a series of manipulation scandals, he’d already earned a reputation as the company’s troubleshooter.
During a decade in Singapore leading the company’s Asian editorial operations, Montepeque brought more transparency to the $6 trillion global energy market. He ordered reporters to stop using anonymous tips to determine fair values of fuels, pushed traders into a system that sent bids and offers to subscribers around the world and made it more difficult to manipulate prices of Dubai crude.
Now, an investigation by Europe’s top antitrust official is targeting potential manipulation of the Platts system -- which depends on traders voluntarily providing information to journalists, who calculate, or assess, prices for crude, fuel and other products, including Dated Brent, which underpins contracts for more than half the world’s oil. The probe comes as global regulators scrutinize financial measures around the world after fining banks about $2.5 billion for distorting benchmarks.
“If the number is perceived to be, or worse yet, pushed to be in favor of a consumer, or a producer, or an intermediary, then it loses relevance, and it should lose its relevance,” Montepeque, 56, said in a July interview at the company’s headquarters in London’s Canary Wharf. “We’re very good at ensuring all the processes we have are totally free market.”
Unlike markets for stocks and futures, where trading is conducted on regulated exchanges with prices visible to all, the buying and selling of $5.7 trillion a year in physical commodities is largely private. Last year, the International Organization of Securities Commissions, or Iosco, issued a report saying benchmarks published by Platts and others remain vulnerable to manipulation.
Companies don’t have to report all of their trades to Platts. Instead, the company, a unit of New York-based McGraw Hill Financial Inc. (MHFI), bases assessments on bids, offers and sales submitted by instant messages, phone calls and its electronic platform, called the eWindow.
Platts reporters, sitting in an open bullpen on the 12th floor of McGraw Hill’s London office, monitor the buying and selling of cargoes of the four North Sea crudes that make up the Dated Brent assessment. At 4:30 p.m. London time, the window closes, and the editorial staff calculate the day’s price.
Firms may selectively submit information to skew the benchmark in their favor, Iosco said. Prices are “out of line with our experience of the day” several times a year, Total Oil Trading, or Totsa, an arm of Paris-based Total SA (FP), Europe’s third-largest oil company, said in an August 2012 letter to Iosco.
“Our comments referred to occasional differences of view on the methodologies applied by Platts,” Totsa said in a Sept. 4 e-mailed statement. “We were answering a technical question on the processes used to construct price series or indices.”
The system created by Montepeque has helped Platts bring more transparency to energy markets and build a business that will earn approximately $500 million this year in subscriptions and royalties for McGraw Hill, accounting for 11 percent of revenue, according to company reports. It publishes about 12,000 commodity-price assessments, references and indices used to price raw materials from sugar to platinum to jet fuel.
Bloomberg LP, the parent company of Bloomberg News, competes with Platts to provide energy news and information, and distributes the company’s data through the Bloomberg terminal to Platts subscribers.
The oil-market investigation became public in May when European Competition Commissioner Joaquin Almunia, who is also pursuing price-fixing allegations related to the London interbank offered rate, or Libor, sent investigators to seize computer records and documents from Platts offices, and raided BP Plc (BP/), Statoil ASA and Royal Dutch Shell Plc (RDSA), three of Europe’s largest oil companies, as well as Rotterdam-based Argos Groep BV. No charges have been brought against any of the companies.
BP, Statoil, Shell and Argos said they are cooperating with investigators.
“The fact that the commission carries out such inspections does not mean that the companies have engaged in any anti-competitive behavior, nor does it prejudice the outcome of the investigation itself,” Ross Whittam, a Shell spokesman, said in an Aug. 29 e-mail.
Platts has been assessing the cost of oil since 1923, when its founder, Warren Platt, started Platt’s Oilgram, a daily newsletter about prices and market information. The benchmarks gained prominence in the mid-1980s when the industry rebelled against a system in which prices were set by international oil companies and later by the Organization of Petroleum Exporting Countries.
Montepeque said Platts has led the attempt to bring more transparency to physical commodity trading. The company is an independent party with no financial stake in whether prices rise or fall, he said.
Critics say Montepeque overlooks the flaws. The company has little ability to detect manipulation, no authority to punish it, and has resisted regulatory oversight while selling subscriptions to the same traders it says it polices, said Craig Pirrong, the director of the University of Houston’s Global Energy Management Institute. He said Platts criticized him for trying to start a non-profit, public price-reporting system.
“He’s representative of the aggressive attitude Platts has with regard to what it is, its franchise and its economic purpose,” Pirrong said in an interview in July.
Platts screens out submissions that don’t meet its published standards, and doesn’t impute motives or seek to punish traders, Kathleen Tanzy, a spokeswoman, said in a Sept. 4 e-mail. If information doesn’t meet the company’s guidelines, it won’t be used, she said.
“The fact that Platts publishes price-discovery data in real time and identifies all bid, offer and trade data by company name -- making it transparent to the market who is doing what -- is a particularly strong deterrent to attempts at distortion,” Tanzy said.
Montepeque has become a lightning rod for industry complaints about the company’s influence.
“He’s politically quite difficult for large corporations to deal with because he just says what he thinks,” said Neil Fleming, an industry consultant who worked at Platts for 20 years and was Montepeque’s boss before leaving in 2009. “He doesn’t bother with diplomacy,” Fleming said in a phone interview from his office near Bury St Edmunds, England, last month.
Pannonia Ethanol, a Budapest-based company that accounts for about 3 percent of Europe’s fuel ethanol-production capacity, complained to EU antitrust regulators last year, saying Platts denied it the opportunity to participate in price assessments. Mark Turley, Pannonia’s founder and president, described Montepeque as “a dictator” in a July 17 interview.
“The problem is that it’s Jorge’s market,” Eric Sievers, chief executive officer of Pannonia’s parent company, Ethanol Europe, said in an interview in Budapest. “And Jorge won’t let us in to sell with everyone else.”
Platts said no one individual has determined the company’s business decisions or editorial guidelines. While Montepeque has contributed to the methodology, he is part of a management team in a company that has about 1,000 employees around the world, Tanzy said in the Sept. 4 e-mail.
“Jorge Montepeque has no control over the market, nor does any individual,” Tanzy said.
Montepeque says he doesn’t take the criticism personally. He prides himself on being dispassionate and analytical. This year, he hired a private tutor to teach him molecular chemistry, and he describes pricing systems in similar terms. Trading combines certain predictable elements, he says, such as the number and quality of crude cargoes and the sailing time to refining centers, and produces a logical, observable result: the price.
“Nothing is ever personal,” Montepeque said. “These are just corporate acts by Platts where we need to report accurately and fairly what we think is a reflection of the normal market.”
Understanding pricing is part of Montepeque’s preoccupation with economic systems. He left his mother and three sisters in Antigua, Guatemala, the former Spanish colonial capital famous for its ruined Baroque churches, in 1976 to study economics at Hunter College in New York.
Montepeque paid his way through school as a short-order cook at a Japanese restaurant in Manhattan’s East Village and working at PIRA Energy Group, a New York-based consulting firm. He said he didn’t care about any subject but economics, and persuaded his college advisers to let him forego other requirements.
“I wanted to know what made the world tick,” he said.
He joined Platts in 1988 as a reporter calculating prices for benzene, a product used to make packaging and textiles, and ethylene, an ingredient in plastics and detergents.
To Montepeque, Platts pricing is an economic machine that runs on information. In his early days, he talked to traders and brokers, scouting out the day’s buying and selling. When a flood knocked out the phone lines of the offices on 48th Street in New York, his editor handed out fistfuls of coins and told the reporters to find payphones.
After Iraqi President Saddam Hussein invaded Kuwait, Montepeque and his colleagues studied a lunar calendar to predict that the U.S. attack would begin on a moonless night in mid-January 1991. Operation Desert Storm began Jan. 17 at about 3 a.m. Baghdad time, and in New York, where it was close to 7 p.m., Platts reporters manned their phones, ready to translate the war into the price of oil.
When Montepeque moved to Singapore in 1991, he found an opaque and slow-moving market where reporters depended on limited leaks of confidential deals, and the publisher didn’t tell the market where the information came from. He said he immediately set about changing it, provoking “disquiet” among traders and Platts staff.
“If traders say ‘you can’t publish my name,’ he was prepared to say ‘Why not?’ where maybe previous generations of Platts market reporters had just accepted it,” Fleming said.
Montepeque decided that Platts would only accept firm bids, offers and trades reported during a 30-minute window. Instead of an average, the company would calculate a price that reflected the value at the end of the half-hour, called market-on-close. No anonymous submissions would be included and the information would be published in real-time to subscribers. These assessments are used throughout the world in contracts for crude, gasoline and power-plant fuel.
“To a certain extent, he forced the trade to use it,” Ian Taylor, president and CEO of Geneva-based Vitol Group, the world’s largest independent oil trader, who was working in Singapore in 1992 when the market-on-close debuted, said in a July telephone interview. “It’s a great way to sell Platts screens and Platts services.”
Montepeque’s influence later expanded into markets in the Middle East and Europe as Platts sought to strengthen its pricing methods for Dubai and Dated Brent crudes. The production underpinning both assessments had declined, making it easier for traders to drive the benchmarks higher. That left refiners and traders stuck paying a premium to meet their own supply commitments.
The rise of derivatives trading made this strategy even more lucrative, Pirrong said. Traders could profit by amassing swap agreements pegged to prices published by Platts and others, and then use their dominant position in the physical market to push the benchmark in their favor, he said.
Squeezes roiled the market and endangered the influence of Platts assessments. Saudi Arabia, the world’s largest oil exporter, abandoned the Dated Brent benchmark in July 2000 for a weighted average based on Brent futures traded on the International Petroleum Exchange, now called ICE Futures Europe.
Two months later, Tosco Corp., one of the largest fuel suppliers in the U.S., sued Arcadia Petroleum Ltd. alleging that Arcadia squeezed the Brent market and drove up prices by more than $3 a barrel. The case, settled within a month on undisclosed terms, challenged credibility of the Brent assessment.
“It needed fixing,” David Hufton, managing director of PVM Oil Associates Ltd., the world’s largest North Sea broker, said in a July interview at his London office. “It needed more than Band-Aid solutions. It needed a wholesale operation on it.”
By the time Platts promoted Montepeque to run global market reporting from London in 2002, U.S. regulators were investigating false price reporting to Platts and other companies that had skewed U.S. natural gas prices. The probe eventually resulted in more than $300 million in fines against firms including Dynegy Inc., Dominion Resources Inc. and Duke Energy Corp. Lawmakers were also scrutinizing the Platts Dated Brent assessment following Tosco’s allegations.
“What we realized, I think, in oil at that moment was that we’re not just an observer, that what we publish has meaning and consequence in world markets,” Dan Tanz, vice president of editorial in the London office of Platts and Montepeque’s boss, said in a July interview. “And we decided that we had to take some steps to fortify our methodology.”
Montepeque responded by pushing for transparency like he implemented in Singapore. To reduce the possibility of squeezes, he increased the amount of oil Platts would consider in calculating the benchmarks, making it harder for any one trader to corner the market.
For Dubai, Platts broadened its formula to include a grade of Omani crude. In North Sea pricing he lengthened the assessment period to increase the number of available cargoes, and allowed trades of two other North Sea grades to be counted in the Brent assessment.
If traders don’t follow the rules or fail to deliver on a trade, Platts can temporarily bar the company from participating, a practice the market calls “boxing,” Tanzy said.
“He was delivering a lot of innovative thinking, and that was what he was employed to do,” Fleming said. “He was relentless about it. He’s very good at enacting change.”
This wasn’t always welcome. When Montepeque introduced market-on-close assessments in 2003 to refined fuels, Total, Chevron Corp. (CVX), the San Ramon, California-based oil company, and Morgan Stanley (MS) went to Argus Ltd., the chief competitor, for gasoline swap prices.
“That was a major blow for Platts,” said Hufton of PVM Oil. Most gasoline traders in Europe continue to quote prices using Argus instead of Platts, he said.
The setback did little to check expansion. The use of Platts assessments is often written into long-term supply contracts between oil producers and refiners. To make a switch, those agreements must be renegotiated.
Platts has continued to adjust its Dated Brent benchmark because of declining production. The company added a fourth grade of crude to the assessment in 2007, lengthened the delivery time again last year, and this year instituted premiums to boost the number of higher-quality cargoes counted in establishing the price. It may extend the delivery period again in the next two years.
Daily exports of Brent, Forties, Ekofisk and Oseberg, the four grades that underpin the benchmark, will be 909,677 barrels a day in October, 21 percent below the five-year average, loading programs obtained by Bloomberg News showed as of Sept. 13. The original Brent field, for which the grade of crude was named, will be decommissioned in 2015.
Brent crude futures dropped to settle at $110.07 a barrel today on the ICE exchange, for a decline of 3.5 percent this month.
The EU hasn’t said when it will complete its probe. Competition Commissioner Almunia said in an Aug. 6 statement that he will finish his investigation “as quickly as possible,” and that the duration “depends on a number of factors, including the complexity of the case, the extent to which the undertakings concerned cooperate with the commission and the exercise of the rights of defense.”
Platts will give the commission a presentation outlining its market-on-close assessment process this autumn, Kenneth Vittor, McGraw Hill Financial’s general counsel, said during a July earnings call.
The commission has sought information from trading firms and other market participants, such as Vitol, Glencore Xstrata Plc (GLEN), Gunvor Group Ltd., Finland’s Neste Oil Oyj and Eni SpA, Italy’s largest oil company.
In the meantime, Platts hasn’t seen any decline in the number of traders participating in its assessments, Tanzy said.
Platts declined to comment on what information the European Commission investigators were looking for in May. Montepeque criticized the commission in June for not being transparent about the target of the probe. The firm’s pricing system is open and consistent, he said in the July interview.
“If we’re publishing a number, and the industry is placing a lot of importance on that number, we need to make sure that it’s robust, that the system is good, and we can sleep relaxed about what we publish,” he said.