By John Kemp
LONDON, Aug 8 (Reuters) - 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 Scotland.
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 world.
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.
The benchmark Brent futures contract, most widely traded on the IntercontinentalExchange (ICE), settles against the Brent index.
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 differentials.
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 declines.
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 on Buzzard.
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 declined.
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 other fields.
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.
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 prices.
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.