Preparing for a Brent Benchmark With No Brent Oil

By Georgi Kantchev And Sarah Kent 

LONDON--It was once a behemoth, a massive North Sea oil field whose importance to the world crude market was summed up by its name atop the global benchmark price: Brent.

Today, the Brent field, northeast of Scotland's remote Shetland Islands, is all but tapped dry. It produces about 1,000 barrels a day in a global market of 93 million daily barrels. Royal Dutch Shell PLC is awaiting approval to scrap the first of four Eiffel Tower-sized platforms that have sucked Brent-branded crude from the seabed for almost 40 years.

In a few years, the Brent benchmark--a crucial metric for global oil prices--will contain no actual Brent at all.

With aging North Sea fields running out of crude faster than predicted, changes to how the global price of oil is calculated are being accelerated, putting a spotlight on the methods used to put a value on the world's most important commodity.

Unlike the price of a share of Apple Inc., for instance, the price of oil is a fuzzy thing. A barrel here isn't worth the same as a barrel there, but benchmarks like Brent provide a stable price point against which oil from anywhere around the world can be traded at a premium or discount.

Platts, the McGraw Hill Financial Inc.-owned news and information service that provides the industry standard for Brent pricing, long ago stopped using only Brent crude to calculate the benchmark. It computes the price every day from information provided by traders buying and selling a mix of grades from other North Sea fields, but has said it could add more oil from other locations as North Sea crude is depleted.

Now, the Brent field's output makes up less than 0.1% of the oil--down from 100% at the benchmark's inception--that could be traded every day to create the benchmark price.

"The changes to Brent might have to happen sooner," said Jorge Montepeque, global director of market reporting at Platts and one of the architects behind the benchmark.

"We could add oil from West Africa, Central Asia and--if you stretch it a bit--even from Brazil," he said.

The looming disappearance of oil from the Brent field comes as the benchmark faces pressure on other fronts: The European Commission is continuing an antitrust probe into the trading activity that sets the price, and competing benchmarks from Dubai and Russia are trying to move into Brent's turf.

Losing the Brent field, or even all production from the North Sea, may not change the benchmark's name or its viability. Investor interest has grown, with trading volumes of Brent futures on London's Intercontinental Exchange more than doubling since 2009 to more than a million contracts a day. The ICE made $231 million from Brent trade last year, more than double the figure of $111 million in 2009.

Experts said Brent would remain an important yardstick for businesses and consumers. Airlines use the Brent futures market to hedge their exposure to oil-price fluctuations. The benchmark is used by businesses, such as refineries, to price the crude they process into gasoline and diesel, influencing prices at the pump.

"There is a huge market based on the various Brent quotes and everybody complains about the way in which Brent quotes are established--or not--but up to now, nobody has come up with any viable or credible alternative, said Dario Scaffardi, executive vice president and general manager at Italian refinery Saras SpA.

Much of the crude oil Saras processes into refined products is priced against the Brent benchmark. It uses the futures market to help hedge its exposure to fluctuations in the crude price.

Discovered in 1971, the Brent field pumped around half a million barrels of crude oil a day at its peak. By the late 1980s, Brent was seen as the primary oil-price gauge because it was one of the largest oil fields with access to Europe, where private companies drove the industry and not state-owned monopolies, such as in the Middle East.

Dwindling output from the North Sea has meant fewer deals involving its crude oil, making it harder to use the oil to establish a representative price. Even after Platts added crude from three other non-Brent North Sea fields to produce its assessment, production from that group fell to 871,000 barrels a day in January, down from 1.5 million in the same month of 2009, data from consultancy Energy Aspects show.

Fewer barrels could make it easier for a small group of rogue traders to manipulate the market.

"As an industry, we need to be better at working together to resolve issues like Brent," said Ian Taylor, chief executive of The Vitol Group, the world's biggest independent oil trader. "The Brent benchmark should be representative of the broader physical market and widening the range of crudes would help achieve this."

The European Commission's probe was sparked by concerns that the oil price set by organizations like Platts may be susceptible to manipulation. Platts monitors the activity in the market to calculate the price of Brent on a daily basis.

"We welcome a broader conversation in the E.U. about benchmarks," Platts' Mr. Montepeque said.

Other benchmarks are looking to take advantage while Brent is under scrutiny, but there are challenges to the upstarts. A Russian benchmark using crude from the Urals region has been delayed because of the conflict with Ukraine. The reach of the primary U.S. price gauge, West Texas Intermediate--or WTI--is limited because it is linked to a landlocked storage hub in Cushing, Okla., and because of the U.S. ban on crude-oil exports.

The Dubai Mercantile Exchange has a benchmark that blends oils from Dubai and Oman, and is used by major producers including Saudi Arabia, the world's largest oil exporter. Launched in 2007, trading volumes have increased rapidly, jumping more than 30% last year compared with 2013. But volumes remain a fraction of those of Brent.

"We're still the baby of the crude-oil market," Owain Johnson, chief product officer of DME, said in an interview.

Seth Kleinman, chief energy strategist at Citigroup in London, said Brent was a "broken benchmark" with no clear alternatives.

"Brent is like democracy," he said. "It's the worst option except for all the others."

Write to Georgi Kantchev at [e-mail] and Sarah Kent at [e-mail]

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