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Urals best addition to Dated Brent: Shell: Update

10 May 2017 13:10 (+01:00 GMT)
Urals best addition to Dated Brent: Shell: Update

Adds further detail and analysis in paragraphs 3, 8, and 10 onwards

London, 10 May (Argus) — Further changes must be made to the North Sea benchmark in the next two or three years to maintain a properly functioning market, including the possible addition of Russian Urals crude to the benchmark, Shell vice-president of crude trading and supply Mike Muller said today.

While the market is currently functioning well, the addition of Troll crude to the Dated Brent benchmark will not be enough to maintain transparency and liquidity in the North Sea crude market indefinitely, Muller told delegates at the Platts Global Crude Oil Summit in London.

From the end of this year, Troll will become the fifth crude grade included in Platts' Dated Brent price — after Brent, Forties Oseberg and Ekofisk. Troll will be added to the Argus North Sea Dated benchmark from next month. Unlike Ekofisk and Oseberg, it will not yet have a quality premium attached and is therefore unlikely to set either benchmark as the lowest priced of the five grades.

Subsequently changes to the benchmark will need to be made within the coming years to ensure its robustness in the global market, and that it is representative, transparent, and liquid. There are several potential options.

The addition of Norwegian Johan Sverdrup crude to the basket is a possibility once production starts at the site towards the end of 2019. But the difference in quality of the crude stream — which is expected to have a gravity of 28°API, compared with current grades ranging between 35-40°API — may shift the value of the Dated Brent benchmark lower, and this is not a desirable thing, according to Muller.

Perhaps it is time to cast the net wider, as a good benchmark need not only be representative of crude produced in the region, but also reflective of what crudes are being run by refineries in the area, Muller suggests.

"If you had to pick one grade of crude, Urals is the one which North West European refineries should be designed to run optimally," Muller said. The quality of Russian medium sour Urals crude is not that different from the average quality of the current Dated Brent benchmark grades. And the average refinery diet is skewed towards Urals and Dated Brent grades, meaning a benchmark including the grade would be more representative of market movements and a closer reflection of the price a given refinery in the region pays for its crude slate.

Urals has long been touted as a leading candidate for inclusion in the benchmark. But its relatively high sulphur levels and the fact it is traded on a cif Rotterdam basis rather than a fob basis have been seen as obstacles. In recent years, political considerations have also become a factor.

In the longer term, a change in the calculation of the benchmark may also simplify how it is set. A move towards using an average of the basket of crudes in the Dated Brent benchmark to set the price, as opposed to using the lowest grade in the basket, may mean unpopular necessities, such as the sulphur de-escalator, could be abandoned. It would also be easier to add heavier grades to the basket moving forward, Muller added.

Argus has published such a price — North Sea Dated average — since October 2007.

As custodian of the North Sea's standard contract — Suko 90 — Shell has traditionally been relatively conservative when it comes to any changes to the North Sea benchmark, with previous changes initiated by price reporting agency Platts, and only adopted by Shell subsequently. Muller's latest comments suggest a greater willingness to take a lead in the evolution of the North Sea benchmark.

Any future changes to the benchmark may be prompted by a drop in the volume of physical crude underpinning Dated. Many fear those volumes could be about to fall sharply in the next few years, following three years of low investment levels in the region. Shell itself is a major producer in the region, producing 269,000 b/d in the first quarter of the year. Muller did not provide any forecasts for Shell's own production expectations.

A delivered Rotterdam version of benchmark is another potential option worth considering, as well as a ship-to-ship Scapa Flow delivery option, although historically the market has tended to shy away from methodologies where ship vetting standards may get in the way of price discovery.

Transparency in the market could also be further improved by the creation of an independent panel of experts, which would underpin any future methodology changes to the benchmark. Assuming the relevant legal and regulatory safeguards were in place for such a panel, this group could help avoid any polarisation of opinion when the ideas for the next big change to the benchmark are raised.