Wednesday, Nov 26, 2008


 
   By Yee Kai Pin 
   Of DOW JONES NEWSWIRES

SINGAPORE (Dow Jones)--Oil price reporting agency Platts is promoting a radical plan to start valuing all the crude produced in Asia-Pacific against Brent, a North Sea grade more at home as a benchmark for European and African supplies.

The proposal is the latest effort by the company to find a suitable price marker for 3 million-4 million barrels a day of low-sulfur or "sweet" crude traded in Asia's spot market.

It's a response to the decline in output of the region's own marker grades: Malaysia's light Tapis crude and Indonesia's medium Minas and heavy Duri.

A major industry concern is that when the liquidity of a benchmark falls too low, the price-discovery process for the rest of the market becomes vulnerable to distortions.

"In Asia-Pacific, there are no new giant crude fields which offer reasonable alternatives as benchmarks for Tapis, Minas and Duri," Platts, a unit of U.S. publishing firm McGraw-Hill Cos. (MHP), said in a white paper last month.

"The Asia-Pacific sweet crude benchmarks have therefore deteriorated as meaningful benchmarks for other regionally produced grades."

Broadly, the plan involves prices of physical Brent cargoes with an assigned loading date, otherwise known as "dated" cargoes, or comparable North Sea grades Forties, Oseberg and Ekofisk.

Brent, a light sweet crude shipped from the Sullum Voe terminal operated by BP PLC (BP), is otherwise best recognized as the reference grade for the ICE Futures exchange contract traded in London.

On Wednesday, Platts' editorial director for Asia, Dave Ernsberger, told Dow Jones Newswires his company has "already laid the groundwork" after it launched an Asian Dated Brent assessment in October, which makes up 11% of an Asian Crude Oil Index meant for contract settlements.

The index, assessed by Platts daily, also includes Tapis, Minas and Duri as well as seven other grades from Abu Dhabi, Dubai, Oman, Angola and Nigeria. 


 
     Far From Asia

While Brent is a tried-and-tested benchmark, a move to tie prices to a grade produced 10,000 kilometers from Singapore, Asia's oil trading hub, highlights the lack of options the region's oil producers face in accurately valuing their cargoes.

Platts, which assesses prices used by global oil majors as well as national oil companies, has made several attempts to boost trading liquidity in marker grades to enable them to remain relevant, but production of Tapis, Minas and Duri have slumped in recent years.

Spot trading in Minas, pumped by Chevron Corp. (CVX), has dropped to about 300,000 barrels each month or 10,000 barrels a day on average - a fraction of its peak output of 420,000 barrels a day, according to Platts.

"Dated Brent is used in spot and long-term contracts to value as much as 60% of the 85 million barrels (a day) of crude oil worldwide," the four-page document said, adding that leading importer China also ships home plenty of Brent-linked West African sweet crude.

Asia-Pacific, which imports most of its crude from the Middle East, is already experimenting with different benchmarks, after Australia's Woodside Petroleum Ltd. (WPL.AU) started selling nearly half the output of its new heavy sweet crude, Stybarrow, on a dated Brent basis, traders say.

Still, specifics of the proposal are somewhat unclear for now and sticking points need to be addressed, said a trading official at an oil major who is a Platts customer. 


 
     Quality Differences

Any decision to benchmark all the eastern grades to Brent would be unprecedented and significantly, such a shift may not be clear-cut because of quality differences.

Whereas crude tied to Tapis or Brent are meant for refining purposes, those linked to Minas are typically burnt as fuel in power plants.

Pushing through a "one cap fits all" approach with Brent may not be meaningful, said a Singapore-based trading house official.

The search for a benchmark is a story already played out in the Middle East market for high-sulfur or "sour" cargoes.

The liquidity of bellwether Dubai crude has shrunk to about four 500,000-barrel cargoes each month, from as many as 23, forcing Platts in late 2001 to allow Oman crude to be delivered as a substitute in deriving its daily price assessments.

When the industry failed to embrace this - Oman is considered more valuable as it's lighter and contains less sulfur - it added Abu Dhabi's Upper Zakum grade in early 2005 as another alternative.

Even the production of Brent has been on the decline, evidenced by Platts' decision last year to include Ekofisk as another substitute, having already taken Forties and Oseberg on board.

-By Yee Kai Pin, Dow Jones Newswires; +65-6415-4062; kai-pin.yee@dowjones.com

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(END) Dow Jones Newswires

26-11-08 0843GMT