By John Kemp
LONDON Oct 26 Severe maintenance overruns at
Nexen's Buzzard oilfield have highlighted the need for
a better regime for disclosing price sensitive information about
oil output and problems in the North Sea.
Buzzard's delays have slashed output of the
benchmark-setting Forties crude stream in October - contributing
to a significant short-term rise in the price of crude and
refined products such as gasoline for customers across the EU.
The EU should set aside objections from the industry and use
the current review of the market abuse rules to mandate
disclosure, and ban trading on information about supply
disruptions, until the information has been disclosed to the
market as a whole.
Buzzard's maintenance was supposed to be completed by
October 10, according to verbal guidance issued to stakeholders.
But in its third quarter earnings release, issued on Thursday,
the company admitted the project had taken longer than expected
and the platform is only now being restarted, some 20 days or
"We are in the process of restarting the platform and expect
production to ramp up in the next week to 10 days," the company
Even now it has not explained the reasons for the overrun.
The earnings release blandly notes that "the scheduled
turnaround ... was completed with no significant issues
discovered, though it did take longer than expected."
Buzzard's problems have been a major contributory factor to
the chaos in the Forties loading programme. All 16 cargoes
scheduled to load in October have been deferred, one November
cargo has been cancelled and two more have been delayed.
Because Buzzard accounts for the lion's share of Forties
output, and Forties usually sets the price for the entire
Brent-Forties-Oseberg-Ekofisk (BFOE) benchmark, which is in turn
used to settle futures contracts, Buzzard's problems have had an
impact out of all proportion to the amount of production
Maintenance overruns helped push Brent for November delivery
up by $7 per barrel (6 percent) between October 3 and the
contract's expiry on October 16, pushing the premium for
November Brent to as much as $1.40 over the December contract
before expiry , and widening the gap with U.S. crude.
Yet the process for disclosing routine maintenance, overruns
and other production problems remains ad hoc and the lack of a
proper disclosure regime heightens the risk of insider dealing
and market abuse.
At present, like other commodity markets, the Brent market
benefits from a special and more generous regime on insider
trading under EU regulations.
For all other asset classes, the EU rules on insider dealing
and market abuse state: "inside information shall mean
information of a precise nature which has not been made public
... which if it were made public would be likely to have a
significant effect on the prices of those financial instruments
or on the price of related derivative financial instruments"
(Article 1.1 Market Abuse Directive 2003/6/EC).
"In relation to derivatives on commodities" however, the
rules apply only to information "which users of markets on which
such derivatives are traded would expect to receive in
accordance with accepted market practices" (Article 1.1
The special treatment for commodities was spelled out in
more detail in a follow-up directive in 2004.
For commodities, the definition of inside information is
restricted to information which is "(a) routinely made available
to users of those markets; or (b) required to be disclosed in
accordance with legal or regulatory provisions, market rules,
contracts or customs on the underlying commodity market or
commodity derivatives market" (Article 4 Directive 2004/72/EC).
So under the special rules for commodities, information
which is not routinely made available or required to be
disclosed does not count as inside information - even if it
would be likely to have a significant effect on prices for the
physical commodity and derivatives based upon it.
Since information about production problems and delays is
not routinely disclosed or required to be disclosed, it does not
count as inside information.
Well-connected market participants can trade on such
information without worrying about whether such trading is
The special exemption for commodity markets is defended by
many in the oil industry. But it has already drawn critical
attention from regulators.
Reviewing the Market Abuse Directive in 2011, the European
Commission worried that "the lack of a clear and binding
definition of inside information in relation to commodity
markets may allow information asymmetries."
As a result, "investors in commodity derivatives may be less
protected than investors in derivatives of financial markets
because a person could benefit from inside information in a spot
market by trading on a related derivative market."
"For this reason the definition of inside information in
relation to commodity derivatives should be aligned to the
general definition of inside information extending it to price
sensitive information which is relevant to the related spot
commodity contract as well as the derivative itself."
The Commission has proposed a new Market Abuse Regulation
which would more or less align the definition of inside
information in commodities with other asset classes (MAR
2011/0295 (COD)). The regulation would also require such
information to be made public as soon as possible.
In January 2012, the Futures and Options Association (FOA),
on behalf of the UK derivatives industry, explained that while
it supported closer alignment of the definition of insider
trading, it had reservations about the broad and uncertain scope
of the proposed changes.
"More clarity" was needed on what would constitute inside
information in commodity markets, said the FOA. "If more clarity
is not provided, and no defences are available, there will be a
chilling effect on the real economy, as legitimate commercial
activities are hindered," the FOA warned.
"Legitimate activities include exercising trading
discretions, hedging underlying assets, and managing changes in
supply and demand, and to meet contractual delivery obligations"
which should all be excluded from the insider trading rules.
The definition should only apply to "events outside of
normal operational activities" ("Position paper on the European
Commission's proposals on MAD and MAR" FOA January 2012).
The FOA provided a helpful illustration of the sort of
exclusion from insider trading rules that it support.
In "Scenario 1 - oil producer pipeline shutdown" the FOA
describes "An oil producer which also carries out trading in
financial instruments and derivatives on commodities by way of
hedging learns of a problem with one of its pipelines resulting
in the shutdown of the supply."
"This would give rise to an exposure as a result of having
to buy in additional supplies to meet obligations. The oil
producer is under no primary legal or regulatory obligation to
disclose the information under EU, national or market rules but
is unsure whether the information may be deemed to have a
significant effect on the price of relevant instruments if it
were made public."
"In the absence of certainty and/or guidance, the oil
producer may take the view that this information may be inside
information under the new definition, in which case, it would be
unable to trade on the basis of this information, and to hedge
the exposure caused by the pipeline shutdown."
The effort to increase transparency could have unintended
consequences, actually worsening volatility and raising prices,
Shell warned a conference in Brussels last month.
The oil company cited the example of a refinery outage
creating a shortage of gasoline. "Currently that's kept internal
within the company," said Mike Conway, president of the
company's international trading and shipping arm, in remarks
reported by Platts.
Forcing immediate disclosure could encourage some other
traders to exploit the company's production problem, and
increase price volatility, creating a price spike ("Draft EU
market abuse rules could raise commodity prices: Shell" Platts
"Just knee-jerking and saying here's what happened could
distort the market in a different way and doesn't allow
companies like ourselves that have a variety of ways to solve
the problem to do it in a way that minimizes the impact to the
marketplace," Conway said.
While banks and hedge funds complain about selective access
to information, Conway countered "we have that information
because we paid for it" by investing in physical infrastructure
But that is no reason why the insider trading rules should
be different for commodity markets.
Market prices are already moving significantly ahead of the
publication of information about delays at Buzzard. In recent
weeks, big changes in the Brent/WTI spread and the premium for
front-month Brent have generally preceded news leaking out that
the resumption of production has been put back again.
Given concerns about the narrow physical base of the Brent
benchmark regulators and exchanges must do everything possible
to maximise transparency to maintain confidence in the system
and avoid the potential for abuse.
Mandating disclosure of production problems and delays as
soon as possible, and bringing them within the scope of the
insider trading rules, is an essential step to maintain and
enhance market integrity.