From The Wall Street Journal
A North Sea oil field named after a 19th century Norwegian prime minister could soon spark a shakeup in the Brent crude benchmark that prices oil around the world.
The widely used benchmark risks losing relevance amid declining production from the oil fields that it is priced off. Other oil benchmarks are clamoring for its role, including in China and Dubai, while the U.S. oil gauge, West Texas Intermediate, is gaining more currency abroad as American crude is exported.
The Johan Sverdrup field, about 87 miles west of Stavanger, Norway, is due to begin production in 2019 and could offer Brent a lifeline by boosting the volume of crude used to price it and making it more reflective of the wider market, analysts say.
Falling output of the oil grades used to set Brent, and the small number of companies that produce it, has also raised concerns that the market is vulnerable to manipulation.
Brent is “absolutely relevant, but there has definitely been pressure on the benchmark over the past few years,” said Bjornar Tonhaugen, senior vice president for oil markets at consultancy Rystad Energy AS. The inclusion of Sverdrup would help prolong Brent’s role as the global benchmark, he added.
Brent crude is only 1% of global oil production
The 30-year old benchmark represents about 1% of global oil production, and that small slice of the oil market is used to set the price of the multi-trillion-dollar Intercontinental Exchange Brent futures market. In the U.S. around 4 million barrels a day of crude, representing around 4% of global crude production, meets the quality requirements to be delivered against WTI futures. Around two-thirds of the world’s oil is priced off Brent—prices that influence costs for electricity generated by oil and the fuel in people’s cars.
Oil production of the basket of North Sea crudes used to price Brent is set to halve to around 500,000 barrels a day by 2025, due to a lack of investment in the region and old fields winding down. The last change to the benchmark came in January, when the Troll field—about 40 miles west of Kollsnes, near Bergen, and operated by Norwegian state-backed Statoil ASA—added around 200,000 barrels a day of supply. But production at Johan Sverdrup—which is named after Norway’s prime minister from 1884 to 1889—is expected to be triple that, exceeding even the output of Ecuador, a member of the Organization of the Petroleum Exporting Countries.
Dated Brent is set by S&P Global Platts, which collates prices of oil sold from the fields and which traders now expect will add oil from Sverdrup.
Jonty Rushforth, a senior director at S&P Global Platts, said it would be premature to announce Sverdrup’s inclusion in the benchmark. But, he added, “within five years Sverdrup will be the largest flow in the North Sea and you can’t really ignore that.”
Other industry players are encouraging S&P Global Platts to add Sverdrup, including Intercontinental Exchange Inc.
ICE backs “any industry decision to support the physical basis of Brent,” said Mike Davis, director of oil market development at the exchange group. “Everyone involved in Brent is aware of (Sverdrup’s) future potential,” he added.
Still, analysts said that while adding new grades could prolong Brent’s use as a benchmark, the expansion would also bring complications. Sverdrup would add a different quality of oil—expected to have higher amounts of sulfur than the existing basket of crudes, which is likely to attract lower prices than crude from the other fields currently used to calculate the benchmark.
“As we’ve added more grades you are exposed to the individual intricacies of all of those fields… it’s not all of the same oil,” said Saad Rahim, chief economist at trade house Trafigura Pte. Ltd.
Sverdrup’s inclusion may also not address concerns that there are too few producers, making it easier to manipulate the price. The new field is operated by Statoil, which already is the dominant producer of the crudes that price in Brent.
Some analysts, though, welcome the increased heft of Statoil, which is set to be renamed Equinor in May, given what they see as the high governance standards of the Norwegian government.
Analysts also say that increased investment in the North Sea opens the possibility that more discoveries could further widen the pool of oil used for Brent. After stagnating for years, investment has increased with the recovery in oil prices and the emergence of private equity investors interested in the industry.
When it comes to Brent’s prospects, “we are bullish—though certainly not complacent,” said ICE’s Mr. Davis.
