Shell's shock move jumpstarts oil benchmark reform debate

LONDON/NEW YORK: Royal Dutch Shell has unilaterally amended the rules of one of the important components of the North Sea Brent market, which sets the basis of billions of dollars of oil trade worldwide in an effort to support trading liquidty. Shell said it would alter its SUKO 90 terms which govern how forward BFOE (Brent, Forties, Oseberg and Ekofisk) cargoes are traded.
In an amendment to terms and conditions posted on its website Shell said BFOE forward cargoes loading in May 2013 and thereafter will be governed by a new "quality premium" wording, in a move the oil major said was aimed at bolstering liquidity in the key North Sea market.
The SUKO 90 terms are the standard terms for the forward BFOE cargo market, a complex interlocking market for bilateral forward oil sales contracts in the North Sea that underpin Brent crude futures, the benchmark for global oil prices.
The Brent benchmark has come under scrutiny from oil market analysts as overly reliant on increasingly small streams of North Sea crude oil production, which critics say leaves the Brent price open to distortion and manipulation.
Shell said it will apply a new quality premium to BFOE forward month contracts - referring to deals in Brent, Forties Oseberg and Ekofisk crudes - the four crudes deliverable against a commitment to supply a forward BFOE cargo. Such cargoes, traded in months, turn physical under nomination procedures also spelt out in SUKO 90 terms whereby loading dates are assigned to individual cargoes, which are thereafter referred to as Dated Brent cargoes.
The Shell amendment does not apply to Dated Brent itself.
Other major participants in the forward BFOE market did not immediately publicly endorse or reject Shell's proposed changes.
But price reporting agency Platts, which sets the generally accepted Dated Brent physical price that underlies oil sales contracts worldwide, said in a statement it would disregard Shell's new terms until it had had time to consult more widely with market participants.
The split between Shell and Platts comes as a steady decline in North Sea oil output and unplanned oilfield outages have raised questions about Brent's credibility as a global benchmark. These small, local supply losses can boost world prices.
"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," Shell said in an emailed statement. "It will therefore contribute toward higher liquidity and better price discovery."
Some traders who do business with Shell were cautiously accepting of the major's new terms, which, if bilaterally agreed to, take effect on Monday. Once May 2013 BFOE is the spot month this will take on greater significance as industry participants are still trading oil for earlier months.
"They look set to improve liquidity. They should make more cargoes eligible to set the price," said one.
Platts did not rule out eventually accepting Shell's new terms but said it wants a formal review involving all "stakeholders" before any changes to the BFOE trading terms take effect.
"While the industry may be exploring alternative concepts," Platts said in an email to subscribers on Friday following Shell's announcement, "Platts assessments shall not reflect escalators until a formal methodology change has been proposed, announced, and reviewed with all interested stakeholders, and formally implemented."
In an addition to the SUKO 90 terms posted on its website, Shell listed a series of quality premiums that will apply depending on whether a cargo of Brent, Forties, Oseberg or Ekofisk is delivered into a contract.
Forties is usually the cheapest of the four crudes. North Sea traders say that at the moment it is the one that most often tends to be delivered into the contracts.
Shell said it will apply the mechanism to BFOE forward contracts it trades with its own counterparties using SUKO 90 terms for delivery in May 2013 and later.