BP has thrown its weight behind a proposal to include US grade WTI in the assessment of the European crude benchmark Dated Brent, and has also volunteered to rewrite Europe's standard forward contract.
In a response to a consultation launched by price reporting agency Platts and the Intercontinental Exchange (Ice), BP has detailed how it thinks the inclusion of WTI in Dated Brent and Ice Brent should work and why an alternative proposal to include Norwegian grade Johan Sverdrup is undesirable.
Platts and Ice launched their joint consultation in June, laying out two proposals to solve the problem of dwindling physical volumes underpinning Platts' Dated Brent assessment. One involves adding WTI into the basket of North Sea grades used to establish Dated Brent, while the other involves adding Norway's Johan Sverdrup to the basket. The consultation followed an attempt by Platts in February to turn Dated Brent into a delivered cif Rotterdam assessment from its current fob North Sea status — a move that was widely rejected by the industry.
BP said it agrees that more deliverable oil is needed in the benchmark, pointing to the regular "dislocations" between Ice Brent futures and the physical Dated Brent price. "BP strongly believes that the inclusion of WTI Midland, executed correctly, is the best solution for enhancing liquidity," it said. BP also suggests removing Brent and Forties from the basket "in the medium term", leaving Oseberg, Ekofisk, Troll and WTI to underpin the benchmark.
The inclusion of Johan Sverdrup in the basket would be "highly distortive", according to BP. The quality adjustments that would be needed to bring the value of the heavy sour grade closer to that of the benchmark's existing five light sweet grades would be too large, the firm said. Demand for the crude from Asia, meanwhile, would further distort the picture, it said.
Forward thinking
BP's response to the Platts/Ice proposal focuses largely on the inclusion of WTI into the North Sea forward — or Cash BFOE — contract. WTI's inclusion into Dated Brent as a cif Rotterdam price netted back to a virtual North Sea fob price to compete with the benchmark's other North Sea grades was seen as fairly straightforward. Argus, which competes with Platts to provide oil price assessments including its own equivalent North Sea Dated benchmark, has been running such a price — New North Sea Dated — since 2018. Argus also publishes an alternative North Sea Dated+JS, which incorporates Johan Sverdrup.
But adding WTI to the North Sea forward contract — which effectively underpins Dated Brent — is much more complex and will require an overhaul of the North Sea market's terms and conditions. The Suko 90 contract, which governs North Sea forward trade and is currently overseen by Shell, is "no longer fit for purpose and certainly not fit to govern a contract with so much additional complexity", BP said, adding that it is prepared to create a new contract.
The new contract will need to be complex to meet BP's proposals. The lack of loading programmes at the US Gulf Coast along with the variable quality of US exports and the additional complications of adding transatlantic freight costs into the calculations will result in a contract far more complex than Suko 90, which is itself not known for its simplicity.
BP's proposals suggest that "in order to retain confidence in the integrity of the specification quality", the WTI crude deliverable into the contract should exclude any crude from a port with a direct pipeline connection to Cushing. It is unclear what BP means by "direct pipeline" but this proposal could effectively exclude a large number of export locations in the Houston area in favour of Corpus Christi.
The lack of loading programmes means measures need to be taken to stop huge volumes being delivered over a short period of time, which would impact the benchmark dramatically. BP's solution is to only allow a narrow window of each month's WTI loadings to be deliverable into the forward contract. By excluding loadings from the first 10 days of the month and the last 10 days, the possibility of large volumes moving from one month to the next to take advantage of market structure will be removed. Without this, WTI could "swamp" the deliverable mechanism and cause "extreme volatility", BP said.
BP's proposals to deal with transatlantic freight costs involve protecting the buyer from freight exposure. But the seller will be less protected, with the full freight costs only becoming apparent in the days after a seller has nominated a cargo. This could potentially deter companies from delivering WTI into the forward mechanism.
Global trading firm Vitol has already publicly backed the inclusion of WTI in the Dated Brent benchmark, while Platts itself has long favoured its inclusion. But other parties are known to be opposed and Platts is expected to move cautiously following its failed attempt to implement changes earlier this year.
