North Sea Crude Benchmark Change Gains Momentum on Platts

Liquidity in North Sea benchmark Dated Brent crude is set to be boosted after Platts, a global pricing agency, announced changes in conjunction with an earlier modification by Royal Dutch Shell Plc.

Platts proposed introducing a quality premium for Ekofisk and Oseberg crudes, two of the four grades that make up the Dated Brent marker used to price more than half the world’s oil, in London yesterday. The move comes less than two weeks after Shell made adjustments to its trading contract for three blends including Brent. A unification of the two initiatives is in the best interest of the market, according to JBC Energy GmbH.

“The escalator issue has successfully been fast-tracked and now looks almost certain to be implemented by mid-year, a timeline that just a few weeks ago would have seemed impossible,” the Vienna-based researcher said in a note today. “Two competing systems could split the liquidity of the BFOE market, which would not be in anybody’s favour.”

The changes aim to increase transparency and trading volume in Dated Brent at a time of falling North Sea production. Shell said earlier this month it would change its SUKO 90 contract for buying and selling BFOE cargoes to introduce a premium for the delivery of higher quality Brent, Ekofisk and Oseberg grades rather than only Forties, which is typically the cheapest and thus used to price the benchmark.

Korea FTA

A free trade deal between the European Union and South Korea opened a new crude flow to the Asian nation, as refiner there don’t have to pay a 3 percent import tariff. The export of tax-free North Sea grades, especially Forties, meant there were fewer cargoes available for trading in the benchmark market.

While Platts is the main provider of price assessment for the North Sea crudes, actual purchases and sales in the over-the-counter market are governed by bilateral contracts, with Shell’s SUKO 90 used as the industry’s template.

“In the past it has mainly been Platts who have come up with changes to the North Sea contract but after a very pre-emptive move by Shell, there was no other option but for Platts to put forward a similar proposal,” Ehsan Ul-Haq, senior market consultant at Walton-on-Thames, England-based KBC Energy, said by phone yesterday.

BP Plc agreed to Shell’s amended terms, which since 1990 has acted as an industry standard for the trading of Brent Blend crude or Dated Brent.

Platts Support

“We are pleased that Platts have supported all the concepts of our Feb. 8 proposal to introduce a quality premium as regards BFOE forward transactions,” Shell said in a statement yesterday.

Platts, a unit of McGraw Hill Cos., is requesting feedback on its proposal by March 10 with the changes coming into effect from May for shipments that load the following month, Jorge Montepeque, global director of markets and pricing at Platts, said yesterday. Its proposal differs from Shell’s in that Platts only suggests escalators for Oseberg and Ekofisk grades while Shell’s also includes Brent.

“It was clear to us that the vast majority of companies were very much on board with the idea,” Montepeque said, adding that Platts had first considered such a move in June 2011, without setting a timetable.

Shell’s changes to its pricing formula will probably be adopted by the market, a Bloomberg News survey Feb. 13 of eight traders directly involved in the business showed. The platts escalator is less complex than Shell’s proposal, JBC said.

Abundant Grade

The amendment should incentivize delivering Brent, Ekofisk and Oseberg into the contract rather than only higher sulfur Forties, which is also the most abundant grade. Shell imposed a 25 percent premium for Brent and Oseberg based on their difference to the Forties differential while for Ekofisk it will be 50 percent, while Platts is recommending a 50 percent premium for the two grades.

Forties loading in 10 to 25 days rose 18 cents yesterday to 28 cents a barrel more than Dated Brent, according to data compiled by Bloomberg.

Daily exports of the four main North Sea crudes will decrease by 10 percent in March from this month, loading programs obtained by Bloomberg News show. Production has fallen year-on-year since for at least five years with March output 35 percent lower than in 2008, the data show.

Platts competes with Bloomberg LP, the parent of Bloomberg News, in providing news and data on energy markets.

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