By Georgi Kantchev And Sarah Kent
LONDON--It was once a behemoth, a massive North Sea oil field
whose importance to the world crude market was summed up by its
name atop the global benchmark price: Brent.
Today, the Brent field, northeast of Scotland's remote Shetland
Islands, is all but tapped dry. It produces about 1,000 barrels a
day in a global market of 93 million daily barrels. Royal Dutch
Shell PLC is awaiting approval to scrap the first of four Eiffel
Tower-sized platforms that have sucked Brent-branded crude from the
seabed for almost 40 years.
In a few years, the Brent benchmark--a crucial metric for global
oil prices--will contain no actual Brent at all.
With aging North Sea fields running out of crude faster than
predicted, changes to how the global price of oil is calculated are
being accelerated, putting a spotlight on the methods used to put a
value on the world's most important commodity.
Unlike the price of a share of Apple Inc., for instance, the
price of oil is a fuzzy thing. A barrel here isn't worth the same
as a barrel there, but benchmarks like Brent provide a stable price
point against which oil from anywhere around the world can be
traded at a premium or discount.
Platts, the McGraw Hill Financial Inc.-owned news and
information service that provides the industry standard for Brent
pricing, long ago stopped using only Brent crude to calculate the
benchmark. It computes the price every day from information
provided by traders buying and selling a mix of grades from other
North Sea fields, but has said it could add more oil from other
locations as North Sea crude is depleted.
Now, the Brent field's output makes up less than 0.1% of the
oil--down from 100% at the benchmark's inception--that could be
traded every day to create the benchmark price.
"The changes to Brent might have to happen sooner," said Jorge
Montepeque, global director of market reporting at Platts and one
of the architects behind the benchmark.
"We could add oil from West Africa, Central Asia and--if you
stretch it a bit--even from Brazil," he said.
The looming disappearance of oil from the Brent field comes as
the benchmark faces pressure on other fronts: The European
Commission is continuing an antitrust probe into the trading
activity that sets the price, and competing benchmarks from Dubai
and Russia are trying to move into Brent's turf.
Losing the Brent field, or even all production from the North
Sea, may not change the benchmark's name or its viability. Investor
interest has grown, with trading volumes of Brent futures on
London's Intercontinental Exchange more than doubling since 2009 to
more than a million contracts a day. The ICE made $231 million from
Brent trade last year, more than double the figure of $111 million
in 2009.
Experts said Brent would remain an important yardstick for
businesses and consumers. Airlines use the Brent futures market to
hedge their exposure to oil-price fluctuations. The benchmark is
used by businesses, such as refineries, to price the crude they
process into gasoline and diesel, influencing prices at the
pump.
"There is a huge market based on the various Brent quotes and
everybody complains about the way in which Brent quotes are
established--or not--but up to now, nobody has come up with any
viable or credible alternative, said Dario Scaffardi, executive
vice president and general manager at Italian refinery Saras
SpA.
Much of the crude oil Saras processes into refined products is
priced against the Brent benchmark. It uses the futures market to
help hedge its exposure to fluctuations in the crude price.
Discovered in 1971, the Brent field pumped around half a million
barrels of crude oil a day at its peak. By the late 1980s, Brent
was seen as the primary oil-price gauge because it was one of the
largest oil fields with access to Europe, where private companies
drove the industry and not state-owned monopolies, such as in the
Middle East.
Dwindling output from the North Sea has meant fewer deals
involving its crude oil, making it harder to use the oil to
establish a representative price. Even after Platts added crude
from three other non-Brent North Sea fields to produce its
assessment, production from that group fell to 871,000 barrels a
day in January, down from 1.5 million in the same month of 2009,
data from consultancy Energy Aspects show.
Fewer barrels could make it easier for a small group of rogue
traders to manipulate the market.
"As an industry, we need to be better at working together to
resolve issues like Brent," said Ian Taylor, chief executive of The
Vitol Group, the world's biggest independent oil trader. "The Brent
benchmark should be representative of the broader physical market
and widening the range of crudes would help achieve this."
The European Commission's probe was sparked by concerns that the
oil price set by organizations like Platts may be susceptible to
manipulation. Platts monitors the activity in the market to
calculate the price of Brent on a daily basis.
"We welcome a broader conversation in the E.U. about
benchmarks," Platts' Mr. Montepeque said.
Other benchmarks are looking to take advantage while Brent is
under scrutiny, but there are challenges to the upstarts. A Russian
benchmark using crude from the Urals region has been delayed
because of the conflict with Ukraine. The reach of the primary U.S.
price gauge, West Texas Intermediate--or WTI--is limited because it
is linked to a landlocked storage hub in Cushing, Okla., and
because of the U.S. ban on crude-oil exports.
The Dubai Mercantile Exchange has a benchmark that blends oils
from Dubai and Oman, and is used by major producers including Saudi
Arabia, the world's largest oil exporter. Launched in 2007, trading
volumes have increased rapidly, jumping more than 30% last year
compared with 2013. But volumes remain a fraction of those of
Brent.
"We're still the baby of the crude-oil market," Owain Johnson,
chief product officer of DME, said in an interview.
Seth Kleinman, chief energy strategist at Citigroup in London,
said Brent was a "broken benchmark" with no clear alternatives.
"Brent is like democracy," he said. "It's the worst option
except for all the others."
Write to Georgi Kantchev at georgi.kantchev@wsj.com and Sarah
Kent at sarah.kent@wsj.com
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