Indonesia oil marker under scrutiny as Minas shrinks

By Maryelle Demongeot - Analysis

SINGAPORE (Reuters) - Dwindling supply of Indonesia's once abundant Minas flagship crude is undermining its role as a benchmark and the price stability of other crude oil in Asia Pacific.

The situation may be at breaking point, some traders say.

Falling output drives up Minas prices and exposes the market to aggressive bidding, pushing the Indonesian crude above Brent values for five of the past six months, making it a bane for refiners grappling with high costs.

Minas output, once above 400,000 barrels per day (bpd), has fallen below 200,000 bpd, traders estimate. Some put it as low as 150,000 bpd due to the ageing field's natural decline.

Less than 50,000 bpd of Minas may be exported. But it is still used as a marker for up to 1 million bpd of Indonesian, Vietnamese and Sudanese crude, a legacy from an era when Minas, which began commercial production in the 1950s, was the largest oilfield in Southeast Asia.

"Minas is a very frail benchmark. It is hard to hedge against it. Brent would be far easier to hedge," says John Vautrain, vice-president of consultancy Purvin and Gertz.

U.S. major Chevron (CVX.N), which operates the Minas field found in 1944 on Sumatra island, and produces more than half of Indonesia's crude supply, declined to comment on flow rates for Minas but said work was underway to sustain output.

Indonesia, a net exporter until two years ago and had this year decided to withdraw from OPEC, expects output to fall to 927,000 bpd in 2008, and keeps exporting less as it has to feed rising fuel demand seen at 1.2-1.3 million bpd.

Some sellers are already shying off Minas as a marker due to its wide price swings between months, as they seek to placate buyers seeking a more stable benchmark like the North Sea Brent basket, even though it is halfway around the world.

"Minas is very choppy. And of course refiners are unhappy with this high Minas price," said a trader with a refiner, who declined to be named on company policy.

Benchmark switches take time, but industry sources say a move to Dated Brent would not be seen as negatively as before.

"I don't think Asia-Pacific refiners have a fear of using Brent now the way they did five or 10 years ago, especially Korean, Japanese and Chinese refiners," said a consultant who requested anonymity.

But he said buyers are unlikely to ask specifically to shift from Minas pricing, especially for Indonesian crude trades.

MINAS VERSUS BRENT

Heavy sweet Minas is usually valued below bellwether light sweet Brent, which yields higher-quality products. But the lack of spot barrels means the Indonesian crude can be bid daily without facing offers, driving up its price.