SINGAPORE/SHANGHAI China will increasingly dominate global oil trade with a fuel import bill worth half a trillion dollars a year by the end of the decade - a lucrative prospect for futures exchanges battling to provide the benchmark to price Asia's oil.
There is no dominant Asian contract to value the 30 million barrels of oil consumed on the continent every day - a third of global demand. The pricing competition is heating up as fuel trade tilts east, a long-term shift that saw China eclipse the United States as the world's top net oil importer in September.
Much of the world's oil supply is priced against futures contracts based on North Sea Brent crude and West Texas crude. Crude exported to Asia is mostly produced in the Middle East and West Africa, and its value is linked to Brent.
Exchanges in Shanghai, Dubai and Atlanta are vying for dominance in Asian oil pricing, with crude from Oman and Siberia among contenders to unseat North Sea Brent.
"I just think it is unacceptable that there is no futures benchmark for Asia given the growing volume of demand," said Tony Nunan, senior advisor on risk management for oil trading at Mitsubishi Corp. Without an Asian benchmark, global producers and traders lack a clear price signal from the region, he added.
One of the biggest complaints voiced by Asian consumers is that the price of Brent reflects the balance of supply and demand in Europe, rather than Asia. The benchmark, one of the two most-traded oil contracts in the world, is hosted on the Atlanta-based InterContinental Exchange (ICE.N).
The Shanghai Futures Exchange plans to launch a new crude contract to price crude delivered into China, aiming to leverage on its location at the heart of trade into the world's largest net oil importer.
The success of the contract will depend on reforms undertaken by President Xi Jinping, who came to power a year ago.
At present, foreign investors are limited in the role they can play in trading on China's futures exchanges, and state controls on capital movement make it tough to repatriate profits. Both factors would prevent international energy firms and trading houses from using the Shanghai contract the same way they do Brent or U.S. crude.
If Xi's reforms ease these restrictions, then Shanghai's crude futures would have a better chance of attracting a wide range of investors and competing for benchmark status.
The SHFE has established an energy trading platform inside Shanghai's Free Trade Zone on which it could launch the contract. The zone is likely to be the testing ground for Xi's economic reforms.
"Launching an international crude futures contract requires regulatory and financial reforms that are at the heart of the policy debate for the free-trade zone," said a bank source familiar with the discussion.
The contract is awaiting approval by Chinese authorities. The SHFE is upbeat about its chances, and says the contract has support from China's top economic planner, the National Development and Reform Commission (NDRC), State Administration of Foreign Exchange (SAFE), China Securities Regulatory Commission (CSRC) and the customs office.
The NDRC, SAFE and CSRC could not be reached for comment.
The SHFE wants to enable international investors to trade the contract through offshore brokerages, providing a quota for them to convert between renminbi and U.S. dollars, traders said.
"There will be a pre-determined quota as long as it's solely for the purpose of trading this contract," Sebastian Pang, head of energy in the Asia-Pacific at brokerage Newedge, said.
Further reform of China's oil market would be needed for the contract to succeed, traders and analysts said. State oil giants PetroChina and Sinopec buy almost all of China's crude imports.
A few independent refiners have import quotas, but they still buy their crude through PetroChina (601857.SS) (0857.HK) and Sinopec (0386.HK) (600028.SS). China would need a deeper pool of buyers and importers for a futures contract, traders said.
Beijing is planning to issue more import licenses to independent refiners, so that pool of buyers is slowly growing.
Even with the reforms, there is no guarantee of success.
Asian oil and gas buyers have been trying to increase their influence over pricing for the past two decades, though the track record for establishing futures contracts is poor.
"It's been very challenging to set up benchmarks and exchange-based products," said Mike Scott, chief executive of oil and metals trade firm Clearsource in Singapore. "There's been so many tries and so many that didn't end with success."
The Dubai Mercantile Exchange launched Oman futures in 2007. While the SHFE sits among consumers, the Dubai exchange aims to leverage its location among the Gulf's top producers to provide a benchmark for oil shipped to Asia. The Middle East is the source of two thirds of Asia's crude imports.
DME's CEO Christopher Fix said the Oman futures contract and the Shanghai contract could coexist as producer and consumer benchmarks.
"I see us representing a producer contract and China representing a consumer contract and a fantastic inter-Asia, inter-time zone, arbitrage opportunity. The kind that could be a game-changer for us," he said.
The DME's Oman futures contract trades about 6,000 lots a day, below the 10,000 target the exchange has said would mark commercial success. That is a fraction of the daily volumes of 600,000 lots each traded on ICE Brent and CME Group Inc's (CME.O) WTI.
One of the biggest challenges for a new contract is generating enough liquidity for investors to consider they can buy and sell at a moment's notice. Once volumes are high enough, oil producers and consumers become more willing to use the prices in their supply contracts, which in turn generates more trading volume.
Several other crude grades are also in the running to become Asia's benchmark. Russia is keen for ESPO, a crude blend that it sends via the Eastern Siberia-Pacific Ocean (ESPO) pipeline to be exported from the Kozmino port to Asia, to become Asia's oil price reference.
The world's largest oil producer is working towards this goal by increasing supply and organizing trade around the grade, Energy Minister Alexander Novak said at the World Energy Congress in South Korea last month.
Still, Middle East producers are unlikely to use the price of the oil of their top competitor to value their own exports. Asian refiners may be reluctant to use Russian oil as a benchmark due to concerns about Moscow's influence over the domestic energy sector.
"When you have an effort being led by the government or heavily influenced by one entity, it doesn't have a flavor of being a free market," said Jorge Montepeque, global editorial director for market reporting at pricing agency Platts.
"That will be the challenge for China as much as it has been the challenge for Russia."
Platts values physical trade in crude cargoes from Dubai and Oman. The daily published price is used to value much of the oil trade from the Gulf to Asia.
(Additional reporting by Aaron Sheldrick in Tokyo, Fayen Wong in Shanghai, Meeyoung Cho, Jane Chung in Seoul and Melanie Burton in Singapore; Editing by Simon Webb)