By John Kemp
LONDON Aug 8 As output from other fields in the
North Sea declines, global oil prices are increasing being
driven by production problems and maintenance at a single,
mid-sized field 60 miles northeast off the coast of Aberdeen in
Buzzard, owned and operated by Nexen, which has a 43 percent
stake, with minority shares owned by Suncor (30 percent), BG
Group (22 percent) and Edinburgh Oil and Gas (5 percent), has
assumed outsized importance in setting oil prices around the
In 2010 and 2011, Buzzard output averaged 182,000 bpd and
141,000 bpd, accounting for 43 percent and 40 percent
respectively of all oil in the Forties system, and 18 percent
and 17 percent respectively of all output from the UK North Sea.
The share would have been higher if Buzzard output had not been
depressed by previous production problems.
Via the Forties pipeline and the Brent futures contract,
production from Buzzard is playing a decisive role driving
prices for almost 60 million bpd of crude sold every day across
Europe, Africa, the Middle East and Asia.
Buzzard's outsized role in the determination of prices
raises serious questions about the liquidity and
representativeness of the current Brent benchmark.
The susceptibility of Brent futures and global
prices to output fluctuations from one small field suggests the
current pricing system is not working properly.
FOCUS ON FORTIES
The benchmark Brent futures contract, most widely traded on
the IntercontinentalExchange (ICE), settles against the Brent
The index is based on assessed prices for a basket of crudes
from four separate pipeline systems in the North Sea: Brent
itself, Forties, Oseberg and Ekofisk, together known as BFOE.
But rather than being based on an average price for the four
streams, the index is set by the cheapest to deliver, which is
normally Forties, owing to its higher sulphur, making it less
desirable for refiners.
Forties sets the price of BFOE, which in turn acts as the
benchmark for around two-thirds of the world's crude daily oil
production of 90 million barrels, mostly in the eastern
hemisphere, through a complex web of official selling prices and
However, the physical basis of the Brent futures contract
has become increasingly narrow in recent years as output from
North Sea fields connected to the four pipeline systems
In September, total production of BFOE is set to fall to a
record low of 720,000 bpd, according to Reuters calculations,
based on loading programmes announced by operators. It is the
lowest since the system was reformed to include Forties and
Oseberg alongside Brent in 2002.
More importantly, production of the decisive Forties grade
will fall to only 200,000 bpd because of scheduled maintenance
Forties is normally the most plentiful of the four streams.
In September it will drop behind Ekofisk (output from the Brent
and Oseberg systems is much smaller).
Each of the four systems (and several other systems such as
Beryl, Ninian, Flotta and Fulmar which are not included in the
BFOE assessment) collects oil from a number of individual
fields, which are then mingled together and delivered to a
terminal for loading onto tankers. Most systems collect crude
from more than a dozen fields.
Forties collects from fields including Brae West, Callanish
and Elgin, as well as the eponymous Forties itself. But because
of its size, and the decline of the others, Buzzard is by far
the largest contributor to Forties, and indeed to output in the
whole UK North Sea sector.
As output from other fields has shrunk, Buzzard has come to
play a dominant role in the production and pricing system.
Charts 1-4 show the distribution of output from all 266 UK
offshore fields at five year intervals between 1996 and 2011,
taken from the International Energy Agency's (IEA) field
production database ().
Production has always varied significantly among fields.
Between 1996 and 2006, however, the distribution of output
actually became more equal, as formerly big producers gradually
From 2007 onwards, the distribution has become much more
unequal again, almost entirely owing to the development of the
highly productive Buzzard field, and the continued decline at
Surging output at Buzzard has partially masked the decline
elsewhere in the UK sector. Between 2006 and 2011, offshore
output declined from 1.676 million bpd to 1.093 million bpd. But
without Buzzard output would have sunk to just 951,000 bpd.
Buzzard is not especially large for an oil field by world
standards. But amid the declining output environment of the
North Sea, it has become a giant in a world of pygmies.
WAGGING THE DOG
Most scheduled maintenance and unforeseen production
problems occur at field rather than system level. Because so
much of Forties now comes from a single field, it has become
much more sensitive than before to supply interruptions.
In September, planned maintenance will shut the field
entirely. Buzzard's contribution to Forties will fall to zero,
slashing total output of the stream, and eliminating a key part
of the benchmark entirely.
For the last couple of years, Buzzard's production profile
has therefore exercised a disproportionate impact on global oil
The concentration of so much influence over the oil market
in a single field is worrying. Even if the market has not
actually been squeezed recently, the small quantity of the
underlying physical supply for delivery is a matter of concern.
It makes inadvertent distortions far more likely.
Prudence suggests both the exchanges (primarily ICE) and
regulators (particularly Britain's Financial Services Authority)
should exercise heightened scrutiny over trading to ensure the
market continues to operate normally, and review whether the
futures contract specifications remain appropriate to ensure it
remains liquid and free from distortions.
In the meantime, the biggest slice of ownership in the
world's single most important oil field will pass into China's
hands by the end of the year, if CNOOC's bid for Canada's Nexen
is approved by regulators in Ottawa.