Viewpoint: North Sea benchmark changes looming

The long road to North Sea benchmark reform will reach an important crossroads in 2019, possibly as early as the first quarter.

Declining production from maturing assets and increasing shipments to Asia-Pacific have prompted a move to develop a North Sea Dated methodology that will reconnect the benchmark to European supply and demand dynamics.

Argus has proposed assessing the Dated basket grades Brent, Forties, Oseberg, Ekofisk and Troll on a fob basis, with the introduction of a range of components based on the freight-adjusted values of cif Rotterdam-priced US WTI, Algerian Saharan Blend, Azeri BTC and Nigerian Bonny Light, Escravos and Qua lboe.

Price reporting agency Platts has proposed consideration of freight-adjusted offers on a cif Rotterdam basis for any of the five grades currently underpinning its assessment, along with the existing activity on a fob basis for these grades. Platts has consulted on adding light-sweet blends into its cif Rotterdam assessment, including Statfjord, Gullfaks, CPC Blend, WTI Midland, Qua lboe and Forcados.

The changes proposed in are part to tackle the problems posed by falling North Sea production. Output from Norway, the UK, Denmark and the Netherlands averaged around 2.62mn b/d in January-October 2018, lower by 5pc than the same period in 2017.

Lower output from Norway again was the driver, as new field start-ups could not fully offset declining production from maturing fields.

Norwegian crude production averaged 1.51mn b/d in the January-October 2018 period, including a near six-year low in September, driven by reduced output from the country's largest producing streams Statfjord, Gullfaks, Ekofisk, Troll and Grane.

Norwegian production — which fell short of Norwegian Petroleum Directorate's forecasts for a 17th consecutive month in October — is likely to continue the downward trend in 2019, at least until the start-up of the giant Johan Sverdrup field late in the year. Output from that field will peak at around 650,000 b/d.

This crude is a candidate to join the benchmark, although there will be at least two years of trading needed for the grade to be considered for inclusion. Besides, the addition of Sverdrup's sour, heavy crude would fundamentally change the character of Dated as the clearing price for light sweet crude available in northwest Europe.

The 50,000 b/d Martin Linge field is also scheduled to start production in early-2019, along with other smaller projects.

Another imminent change that will have an effect on the benchmark is the addition of a quality premium (QP) adjustment to Troll, starting with cargoes loading from April. The methodology for Troll's QP will follow those of Oseberg and Ekofisk, and will mean the grade more often sets the benchmark as the lowest priced of the five.

UK output held steady in 2018, and is likely to rise in 2019. New field start-ups will drive the rise, as will increasing output from recent start-ups such as Clair Ridge and Garten. The 55,000 b/d Mariner heavy crude field — which was scheduled to start in late-2018 — is now likely to begin production in the first half of 2019.

Eastbound shipments of North Sea crude remained relatively strong in 2018. However, the UK's exit from the EU could mean a decline in flows of North Sea crude to South Korea in 2019. The South Korea-EU free-trade agreement (FTA), signed in July 2011, removed tariffs and opened the way for South Korean refiners to purchase North Sea crude. Absent this, Forties will be less competitive for South Korea and its refiners could seek alternatives.

South Korea's imports of Forties crude have been declining anyway because of increased competition in the Asia-Pacific region and specifically from China, which remains the main Asia-Pacific importer of Forties in 2018 so far with 59pc of the average 223,000 b/d that moved east in the January-November 2018 period.