February 20, 2014 / 5:56 PM / 3 years ago

No easy fix for broken Brent oil benchmark

6 Min Read

* Vitol boss calls for widening of Brent benchmark

* Platts, Argus see need to add new grades over time

* Difficult to add Nigerian, Russian crude to Brent-traders

By Dmitry Zhdannikov, Claire Milhench and Alex Lawler

LONDON, Feb 20 (Reuters) - The oil industry hopes Norway will bring plenty of new oil onstream to help fix the Brent benchmark as other solutions - such as adding Russian or Nigerian crude to the North Sea mix - pose too many risks, executives and traders said.

A long-running debate about Brent, which is facing a drop in the North Sea supply underpinning the contract and which critics say is therefore vulnerable to manipulation, entered a new phase this week.

Ian Taylor, the chief executive of the world's largest trader Vitol, called for fundamental and immediate reform.

His comments added fuel to the controversy following the opening by European authorities last year of a probe into suspected manipulation of oil prices. Brent is used to price two-thirds of oil globally.

Taylor said Brent, which is currently calculated using four North Sea crude grades, should be broadened to include crudes from West Africa, Kazakhstan, Algeria, maybe Russia and even the United States because of dwindling North Sea output.

The issue has been a talking point for traders and executives in London for the annual IP Week industry gathering and several said it be very hard to bring in crudes from more distant sources to boost the global role of Brent.

"It feels to me like we are quite a long way away from that - because of the freight differences, because of the quality differences," Tony Hayward, chief executive of Genel Energy , told a conference organised by Energy Institute.

"I think we will see the emergence of some more global gas benchmarks... But I don't see there being a global oil price benchmark any time soon," said Hayward, a former CEO of BP , one of the world's largest oil traders.

Traders and executives have insisted for decades that a benchmark needs at least three elements to be successful - ample supplies of material, a well-developed derivatives market behind it and politically unrestricted deliveries.

If dwindling supplies are the Achilles heel for Brent, it is the monopoly of the Russian state over pipelines that has so far prevented the Russian grade Urals from becoming a benchmark. In Nigeria, oil theft is seen as a major risk.

Jonathan Kollek, head of Russian and former Soviet Union offices at trading house Trafigura, said that rather than tinkering with Brent, a new benchmark could be based on Urals, provided it was based on trading outside Russia in a hub such as Rotterdam.

"Instead of trying to fix something, I would create something new using Urals provided it is done on a non-Russian territorial basis," Kollek said.

Didier Casimiro, vice-president for commerce and logistics at the Kremlin's oil champion Rosneft, said Russia should get its first oil benchmark in Asia.

Eyes on Norway

The Brent benchmark is underpinned by four North Sea crude streams - Brent and Forties from the British side, and Norway's Oseberg and Ekofisk. Together they are known as BFOE.

Output of these four grades has fallen by more than 20 percent in the past four years to below 1 million barrels per day (bpd) in February, according to Reuters data.

"As a reminder, no-one is forcing people to price oil off of Brent. If they want to price ex-Dubai or (U.S. crude) WTI or any new benchmark, they can or could do it," one trader said.

Taylor said he was concerned that large volumes of Brent were flowing to Asia, encouraged by a free trade agreement (FTA) between the EU and South Korea, which made those deliveries cheaper than other grades.

Changing the FTA to reduce those deliveries could be one solution, traders said.

Platts, a unit of McGraw Hill and the dominant oil pricing agency, says fundamental changes to Brent may be needed but not immediately.

Argus Media, a Platts competitor, says it believes that over the next few years West African and then Urals grades will inevitably be added to help assess Brent.

"Adding Russian crude would solve the issue of volume," said Peter Caddy, head of business development at Argus.

Russia exports over 3 million bpd of Urals but most traders say they are sceptical about adding Urals or African grades.

"Urals would not really introduce more liquidity into the market, it would only introduce more quality problems," one trader said, referring to the fact that sour and heavy Urals is inferior in quality to lighter, sweeter Brent.

"And whilst West African is sweet, it is five weeks out versus two to three weeks for North Sea, which would introduce structure into the benchmark," he said referring to differences in loading schedules for African grades and Brent.

The chance of making large new oil finds are low on the North Sea's British side, where output peaked in 1999. But Norway plans to revive production after a decade-long decline, although a major field, Johan Sverdrup, will not start up until 2019.

Some traders saw no need to add any new grades for now, following the introduction by Platts last year of quality premiums for Oseberg and Ekofisk, intended to make it easier for them to be delivered into contracts. Others said existing grades of Norwegian crude, such as Statfjord, could be added.

"I would just include more Norwegian grades - just grab whatever barrels you can find that are both domestic and sweet, and hope the Norwegians strike it big in the future," one trader said.

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