North Sea Pipeline Crack Stress Tests World’s Most Important Oil Benchmark

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By Laura Hurst (Bloomberg) — When a vital North Sea oil pipeline cracked earlier this month, it did more than halt the flow of barrels: it stress tested the world’s most important physical crude-price benchmark for producers, traders and consumers.

The 40-year old Forties Pipeline System was shut down on Dec. 11 after a hairline crack was discovered near Aberdeen, Scotland. The outage resulted in the loss of 40 percent of crude that forms the world’s most important physical oil benchmark, Dated Brent. Flows of crudes underpinning the measure fell to the lowest since at least 2007 and not far from a level that could even have undermined the reliability of the yardstick.

“It’s the most important benchmark, but on the other hand it’s only 1.5 percent of global production, so it’s very strange,” says Hans van Cleef, ABN Amro senior energy economist. “It remains remarkable to see how big an impact can be from such a small production area.”

Dated Brent matters because producers and traders use it as a basis to sell crude oil around the globe. That means the price assessments made by its publisher S&P Global Platts directly influence how much revenue flows into the coffers of nations like Saudi Arabia, Nigeria, Iran and Iraq — not to mention North Sea producers themselves.

Platts has long maintained there needs to be a minimum of 500,000 barrels a day of crudes for the measure to retain full reliability. When the Forties network stopped, shipments of grades comprising Dated Brent fell to about 812,000 barrels a day for December, plans obtained by Bloomberg show. But that figure assumes some Forties cargoes will flow this month. If they don’t, shipments could be closer to about 650,000. Ineos, which operates the pipeline, said Thursday repairs should be complete around Christmas with flows normal early in 2018.

Helpfully for Platts, the company had just added a new grade — Norway’s Troll — to the Dated Brent mix just before the Forties system stopped. Without Troll flows of about 200,000 barrels daily, shipments would have fallen much closer to Platts’ threshold. Troll was added to four others — Brent, Forties, Oseberg and Ekofisk. It will boost the basket to around 1 million barrels of oil a day when everything’s working normally.

“The addition of Troll has enabled Dated Brent to remain healthy and well supplied during the largest pipeline disruption in its 30 years history,” said Jonty Rushforth, head of oil pricing at Platts. The company kept publishing its assessments of Dated Brent throughout a force majeure that ensued after the pipeline was cracked.

Work to Do

Platts is constantly looking to keep the pool of crudes underpinning Dated Brent big enough to make it a reliable benchmark. The Dated Brent price started in 1987 reflecting only oil from the Brent field. As volumes fell, Platts added Forties and Oseberg crude in 2002, followed by Ekofisk in 2007. There are still wrinkles with the inclusion of Troll that Platts is resolving. Its relative quality is high so Platts is looking at introducing so-called “quality premiums” for the grade, but wants to see how it trades first. The mechanism, which is used with Ekofisk and Oseberg, reduces the dominance of one grade in the basket by adjusting for quality differences.

There are candidate crudes to add to the basket to maintain the benchmark’s reliability not least the Johan Sverdrup mega-field that is due to start in 2019. But in the past few years talk has gathered pace about including oil from outside the North Sea, with barrels from Russia, the Caspian Sea and West Africa among those discussed by senior industry figures including Mike Muller when he was head of crude trading at Royal Dutch Shell Plc.

Either way, the crack in the Forties pipeline — and the resultant dip in flows — serves as an urgent reminder of the need to ensure enough crude is in included in the benchmark so that prices stay reliable.

“Supply crunches are only going to increase over the long term,” said Joel Hanley, an editorial director at Platts. “So more oil has to come in”.

© 2017 Bloomberg L.P

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