UPDATE 1-Shell's shock move jumpstarts oil benchmark reform debate

Fri Feb 8, 2013 6:59pm EST

Related Topics

* Shell's rules start Monday for May and beyond cargoes

* Rules would improve liquidity in North Sea market -Shell

* Platts says will ignore Shell's terms for now

By Alex Lawler and David Sheppard

LONDON/NEW YORK, Feb 8 (Reuters) - Royal Dutch Shell upended the oil world on Friday, unilaterally rewriting the rules of the market that sets the basis of billions of dollars of oil worldwide, risking a liquidity-sapping confrontation with other actors.

In a notice published on its website, Shell said it would alter its SUKO 90 terms in the so-called Dated Brent market starting on Monday for cargoes loading in May and thereafter in a move the oil major said would bolster liquidity in the key North Sea market.

The SUKO 90 terms are the standard terms for the Dated Brent market, a complex interlocking market for over-the-counter forward oil sales contracts and physical oil cargoes in the North Sea that underlies Brent crude futures.

Dated Brent has come under scrutiny from oil market analysts as overly reliant on increasingly small streams of North Sea crude oil production, which critics say leaves the Dated Brent price open to distortion and manipulation.

Other major participants in the Dated Brent market did not immediately publicly endorse or reject Shell's proposed changes. But price reporting agency Platts, which sets the generally accepted Dated Brent price that underlies oil sales contracts worldwide, said in a statement it would ignore Shell's new terms until further notice.

Platts' rejection of Shell's proposed changes risked fragmenting liquidity in the Dated Brent market, oil traders said, raising the specter of a repeat of a freeze up of the North Sea oil trade last seen in 2002 when major participants failed to agree on changes to the rules of the market.

"It is a serious headache for Platts because they have been trying to find a consensus solution to the (North Sea) liquidity problem," said one veteran oil trader.

Officials at Platts, a unit of McGraw-Hill Corp were not immediately available to comment.

CAUTIOUS OPTIMISM

The split between Shell and Platts comes as a steady decline in North Sea oil output and unplanned oilfield outages have raised questions about Brent's credibility as a global benchmark. These small, local supply losses can boost world prices.

Shell said it will apply a new Quality Premium to BFOE forward contracts - referring to deals in Brent , Forties Oseberg and Ekofisk crudes - the four crudes that help to set dated Brent, but not to dated Brent itself.

"The new robust and transparent Quality Premium mechanism will support the Brent benchmark by allowing for more crude grades and cargoes to be used in establishing the underlying market price," Shell said in an emailed statement.

"It will therefore contribute towards higher liquidity and better price discovery."

Some traders who do business with Shell were cautiously accepting of the major's new terms, which take effect on Monday.

"They look set to improve liquidity. They should make more cargoes eligible to set the (Dated Brent) price," said one.

Others suggested the terms would reduce the influence of oil purchases by South Korean refiners that have been blamed for distorting Dated Brent in recent months.

A free trade agreement between the European Union and South Korea has made Forties crude more attractive to South Korean oil refiners, introducing a new element that some traders say has skewed the relatively small market for Forties crude.

Platts did not rule out eventually accepting Shell's new terms but said it wants a formal review involving all "stakeholders" before any changes to the BFOE trading terms take effect.

"While the industry may be exploring alternative concepts," Platts said in an email to subscribers on Friday following Shell's announcement, "Platts assessments shall not reflect escalators until a formal methodology change has been proposed, announced, and reviewed with all interested stakeholders, and formally implemented."

The rift between one of the most powerful traders in the North Sea crude market and the price assessment agency risks creating a dual market in the North Sea Brent, oil experts said, and could cut into liquidity if the market becomes fragmented.

In an addition to the SUKO 90 terms posted on its website, Shell listed a series of quality premiums that will apply depending on whether a cargo of Brent, Forties, Oseberg or Ekofisk is delivered into a contract, effective Feb. 11.

Forties is usually the cheapest of the four crudes. North Sea traders say that at the moment it is the one that most often tends to be delivered into the contracts.

Shell said it will apply the mechanism to BFOE forward contracts it trades with its own counterparties using SUKO 90 terms for delivery in May 2013 and later.

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