Industry accepts WTI inclusion in Brent, hurdles remain

The inclusion of US crude WTI in Europe's Brent complex has been accepted by the industry, delegates heard today at the Argus European Crude conference in Geneva, but disagreements remain about how to add the US crude to the North Sea forward market.

Competing contract terms from BP and Shell have traded in the market in recent weeks. Shell's terms include the delivery of WTI on a delivered, or cif, Rotterdam basis, ensuring the cargoes can only be delivered to Europe. BP's contract allows for WTI to be delivered to a region other than Europe, which has more in common with a fob contract.

Shell's objection to the inclusion of WTI on this basis was driven by the potential tax implications, one speaker said. Internal trade between the company's US and European divisions means that an fob delivery of WTI could leave them exposed to US tax authorities.

Another speaker said there is confusion over which regulatory regime would have responsibility for the trade. Delegates heard that an agreement on the eventual contract terms would not emerge overnight, and there could be more than one set of contract terms trading for two to three years. Trading of a cif contract terms alongside fob contract terms was not sustainable, the conference was told.

The original proposals from price reporting agency Platts had required the issuance of loading programmes at the US Gulf Coast, a requirement which has since been abandoned. This will leave the amount of crude underpinning the benchmark effectively unknowable.

While the arguments over contract terms are seen as something of a niche issue, the implications are huge with the forward contract the key link between the Dated benchmark and the Ice Brent futures contract. Previously, the widespread acceptance of Shell's Suko-90 contract has enabled the market to operate a system of "chaining" cargoes of Brent, Forties, Oseberg, Ekofisk and Troll — and potentially WTI — and allowed for the assessment of daily forward prices, which form the underlying price of Platts' Dated Brent and the Argus alternative, North Sea Dated. Should the market fail to agree to common terms, then confidence in the Brent complex could falter and liquidity decline.

By Michael Carolan