* Probe follows more scrutiny of benchmarks post-Libor
* Platts unique in using trading "window" to assess prices
* Agency has long defended its oil assessment process
By Peg Mackey and Alex Lawler
LONDON, May 15 A European investigation into
alleged price rigging by major oil companies has drawn attention
to leading price agency Platts and the way it sets oil price
Authorities on Tuesday carried out a surprise inspection at
Platts' London bureau as well as the offices of Royal Dutch
Shell, BP and Statoil. Officials were
searching for evidence that the firms had distorted prices
reported to Platts in an attempt to influence the cost of oil.
The move follows more scrutiny of financial benchmarks by
authorities since the Libor rigging scandal. Statoil said the
suspected violations were related to the Platts price assessment
process and may have been going on since 2002, when oil traded
at just $20 a barrel, a fifth of its price today.
For more than a century Platts, a unit of McGraw-Hill
, has provided clients with price benchmarks set by
reporters for opaque energy markets. As the undisputed lead
price reporter, its assessments are used to close physical and
derivative deals worth billions in a $2.5 trillion market.
"Platts is the main price reference for the physical oil
market," said Olivier Jakob, oil consultant at Petromatrix in
Zug, Switzerland. "So if you were to close Platts tomorrow, you
would have a very big problem."
Now the methodology designed by Platts to assess the value
of oil is under scrutiny. One question may be whether the
so-called Platts "window" or market-on-close (MOC) system - a
daily half-hour period in which it determines prices through a
series of bids, offers and trades - amounts to selective
Platts' smaller rivals in the price reporting business -
ICIS, a unit of Reed Elsevier and privately-held Argus
Media - do not use a window-based process to assess prices.
Argus said it has received no recent inquiries from European
regulators. ICIS could not immediately be reached.
"The MOC process has faced criticism because it concentrates
price discovery in a small assessment time window, perhaps
making it more prone to potential manipulation," said IHS Energy
analyst Roderick Bruce.
"Other pricing techniques employed by price reporting
agencies, such as volume-weighted averages, have also come under
scrutiny in recent months."
Platts declined to comment on Wednesday but has already said
it disagrees with the suggestion that it has too much power and
that its focus as an independent price reporting agency is to
maintain the integrity of its assessment processes and the
prices they produce.
Complaints about the process do not seem to have diminished
what has been an extraordinarily lucrative part of McGraw Hill's
business. The company's commodities-related revenues -- largely
Platts -- have surged by more than 40 percent in two years to
$489 million in 2012, according to an SEC filings.
It cited Platts' "market data and price assessment" as
having fuelled last year's 17 percent growth. A series of
acquisitions - including consultants Bentek Energy and Steel
Business Briefing in 2011 - also boosted revenues.
Thomson Reuters, parent of Reuters news, competes
with Platts, Argus and ICIS in providing news and information to
the oil market.
A Reuters reporter observed the operation of the window last
year at Platts' London offices and was briefed by a senior
editor on the company's methods.
Companies post bids, offers and trades on Platts Global
Alert, the company's screen-based news and pricing network.
Reporters use phone and instant messenger to gather additional
In London, the window usually starts at 4 p.m.
Then, reporters huddle over computer screens to evaluate
data - price, volume, delivery terms and specifications - on the
basis of Platts' methodologies to set values, a process that can
take up to two hours.
The MOC made its debut in Asian oil trading in 1992 and in
Europe in 2002. Prior to that, Platts produced its daily
assessments from a weighted average of deals done.
"There is an element of precision that has emerged," Dave
Ernsberger, Global Editorial Director of Oil at Platts, told
Reuters during the demonstration of the system last year.
"We've moved from a world of opinion to a world of fact."
Platts' influence in the world oil market has grown over
time, prompting critics to say it's too powerful - acting as a
rule-setter and barring some participants from the window.
For example, months before Lehman Brothers went under during
the global financial crisis of 2008, oil traders voiced concern
about Lehman's viability. Platts barred the bank from trading
oil contracts on its system, a procedure known as "boxing."
Today, Platts routinely boxes companies temporarily for such
things as shipping technicalities or failure to play by the
agency's informal trading rules, reducing their influence in the
market and, say critics, making Platts unusually powerful.
"If Platts blacklists you, you're out," said an oil market
source, who declined to be identified. "We hate to be boxed."
Platts has a stringent process for letting new companies
join the process of contributing to price assessments.
"Lehman showed Platts they were right to protect the
sanctity of their window process and the counterparties who may
not know better," said a senior oil executive at a major company
who requested anonymity. "But what happens if they are wrong?"
The publisher has 240 companies that take part in its
assessment process and says many more are lining up to join.
Platts' Ernsberger, speaking last year, said its discretion
over who participated was justified to ensure the system worked
well: "Platts is not where you prove yourself," he said.
"You have to have a track record: trading wherewithal to
understand the methodology and logistics."
Another example of Platts' power arguably occurred in March
over plans to reform the Brent oil benchmark, the world's main
price reference for trading cargoes of crude oil.
Shell proposed introducing quality premiums to encourage
more types of crude to be delivered into Brent forward
contracts, an idea backed by BP. A few weeks later, both ended
up agreeing to a counter-proposal by Platts, which was different
in some respects to the changes the oil firms had sought.
Platts has faced scrutiny before. More than a decade ago,
U.S. federal energy regulators in 2002 investigated the role
published natural gas indices played in the California power
trading scandal and price spike. They determined that traders
had submitted false prices to publishers like Platts.
While power traders eventually adopted benchmarks based on
trades conducted on the IntercontinentalExchange for
trading and price discovery, many natural gas contracts are
still settled on published indexes like Platts' Gas Daily.
Oil traders on Wednesday said there was no sign of the
investigation impacting on activity in the window and Platts'
introduction of the quality premiums was working well.
"They are everyone's favourite enemy. We can't live with
them, but we can't live without them either," a senior source at
a trading company told Reuters. "The industry created a rod for
its own back by going down the road of having a journalistic
assessment many years ago."