Proposed changed to North Sea Dated could further strengthen its effectiveness as a global benchmark in 2015, as production in the region stabilises.
Proposals are being considered to extend the window for assessing individual grades to include cargoes loading up to a month ahead of the day assessment. Presently, only cargoes loading 10-25 days ahead of the day of assessment are used in establishing prices. The move should allow more cargoes to be included in the assessment of the North Sea Dated price. More cargoes of Oseberg, in particular, would be included. Oseberg presently trades further ahead than Forties or Ekofisk and so rarely affects the benchmark.
The changes have yet to be agreed by the big North Sea producers, with some in the market mooting the use of a futures-based benchmark instead. Pricing individual grades at a differential to an Ice Brent price would remove complexity and increase liquidity. But the idea has little support, so far.
Concerns over the validity of the North Sea Dated benchmark were already eased in 2014 as measures taken to increase the effectiveness of the benchmark combined with stabilising North Sea output to ensure physical trade continues to underpin Dated. A long-term decline in production of the four North Sea Dated grades — Brent, Forties, Oseberg and Ekofisk — had led to concerns that the benchmark would soon lose the physical element that underpins it.
But production appears to have stabilised. Between 2008 and 2013, loadings of the four grades declined by an average of 9pc each year, dropping to a low of 864,000 b/d in 2013 from 1.4mn b/d in 2008. But, in 2014, average loadings are expected to have climbed to 870,000 b/d. And North Sea production is expected to remain relatively stable for a number of years as new start-ups offset the declines at existing fields.
But there are concerns that the fall in oil prices that started in June will put an end to new start-ups in the region, or even lead to abandonment of mature fields where the cost of extraction is high. The UK government has already taken some measures to mitigate the effect of lowering oil prices, cutting a supplementary tax on North Sea operators by two percentage points to 30pc, expanding the allowances for clusters of fields with high pressure and high temperature reserves, while also examining a more thorough overhaul of the tax regime.
Future UK production could also benefit from the start-up of a new regulator — the Oil and Gas Authority — early next year. The new body will be charged with finding ways of maximising the UK's production and has the full support of the industry.
But such measures will take time and there are fears that the long-term decline in production could resume, as investment wanes. Investment offshore Norway is expected to fall by 11pc next year, according to the Norwegian Oil and Gas Association (NOGA). Norway's state-controlled Statoil has already postponed a final investment decision on the $14bn-16bn Johan Castberg development in the Barents Sea after failing to find enough oil to anchor the project, while several other investment decisions that were expected this year have not yet materialised.
One crude that will see rising production levels in 2015 is Flotta — or Flotta Gold as it is now being called. Volumes will be boosted by production from the Golden Eagle development, which began more than a month ago. The project — which includes the Golden Eagle, Peregrine and Solitaire fields — will reach peak output of around 70,000 b/d from 15 production wells late next year. Golden Eagle crude feeds into the Flotta stream and will eventually change the crude's quality significantly.
At 36.9°API with a sulphur content of around 0.82pc, Flotta is the North Sea's one truly sour grade. But the addition of the Golden Eagle crude will eventually lower the blend to around 36.5°API, with a sulphur content of 0.64pc.
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