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SINGAPORE: Asia-Pacific is close to ditching entrenched but volatile local benchmarks in favour of European bellwether Brent to price Southeast Asian crudes, as the top oil consuming region increases imports from across the globe.
The move would homogenise and simplify a fragmented pricing structure in Asia, user of a third of global crude, extending Brent’s influence as a cross-continent price marker beyond the 70 percent of world supplies that now use it as a reference.
It would boost transparency by putting Asian crude on a common platform with growing imports of rival Brent-linked sweet grades from the Atlantic Basin, Central Asia and Latin America. Brent may also be a stepping stone for the evolution of other markers, such as Russian ESPO Blend, some traders said. Net crude imports into Asia will need to grow almost 3 million barrels per day (b/d) by 2015, FACTS Global Energy projects.
By 2012, Brent will have replaced regional benchmarks such as the Asia Petroleum Price Index (APPI) and Indonesia Crude Price (ICP), a Reuters survey of traders showed. Local markers suffer from low liquidity due to production decline at mature fields, with prices frequently diverging from global benchmarks, traders and analysts said.
“Inadequate liquidity reduces confidence in the benchmarks and increases cost of hedging,” said John Vautrain, senior vice president of Purvin & Gertz in Singapore. “The exceptional depth of the Brent futures market makes Brent an attractive benchmark.”
Output of Malaysian light sweet benchmark Tapis has fallen to around 190,000 b/d from a peak of more than 350,000 b/d in the 1990s. Most of that is kept for refining by equity producers ExxonMobil and national oil company Petronas, leaving little for the spot market.
Output of Indonesian Minas, marker for heavy sweet crudes, is estimated to have fallen to 185,000 b/d from over 400,000 b/d in the late 1990s. “I would like to see a replacement of these because they are easily manipulated,” said a trader with a Northeast Asian refiner. “Dated Brent is more suitable for the regional grades.”
In the poll of 12 traders active in the Asia-Pacific physical crude market, 11 said Brent would become the benchmark for most of the region’s sweet grades. Eight traders said that would happen within two years. Brent was a closer match to Minas than American benchmark West Texas Intermediate (WTI), the world’s second-most widely used marker, said Andrey Kryuchenkov, commodities analyst at VTB Capital in London.
“Brent has a very good reputation among Asian buyers. There’s a massive OTC market, and when they choose to do swaps they might price off Brent,” Kryuchenkov added. A switch could lift Brent futures trading volume on the ICE Exchange and boost Brent’s use in the over-the-counter market.
Wide price swings forced Seapac Services to revise the formula used to derive the APPI from June 1 after market players shunned the Southeast Asian sweet crude marker. “APPI had a good purpose 10 or 15 years ago, but it didn’t change with the requirements of the market,” said a trader with an Asia-Pacific producer. Australia and Papua New Guina led the way, pricing most crude and condensate on Brent after a gradual shift from APPI in 2009.
Vietnam plans trials to price spot sales of its crude on a dated Brent basis, while Indonesia will re-evaluate its formula by year-end, industry sources said. “Indonesia is studying a switch to dated Brent for its formula,” said an energy ministry official, declining to be named. China’s oil exports, also pegged to the ICP, would follow changes to the formula, a person familiar with the issue said.
Vietnam has received proposals from oilfield partners, including changing its price formula to 100 percent dated Brent or Platts’ Minas assessment, a source close to the matter said. “The first step is to try to offer on spot cargoes by the end of this year,” the source said, adding it might start with November exports. PetroVietnam will review the results six months later and decide if it will change its Minas formula.
Adopting Brent has been easier for private oil producers such as Australia’s BHP Billiton and Woodside Petroleum, as they have produced new crudes for which they can choose price formulas in contracts. It is harder for firms to modify existing contracts.
State firms, including Petronas, may oppose a transition to new benchmarks on the basis of safeguarding national interest, some traders said. “There are certain countries that will try to keep their own formulas,” said a trader with a European firm. “I don’t think Petronas will ever be going to Brent, maybe they will just change the formula.”
Petronas has no plans to review its 100 percent APPI formula and was unlikely to switch due to concern Brent reflected market dynamics in the North Sea, far removed from Asia, people familiar with the matter said.
“Brent is an Atlantic Basin crude and can be influenced by logistical and market conditions independent of factors that influence the Asian market,” said Lim Jit Yang, principal consultant and head of price analysis at FACTS in Singapore.
Petronas’ decision on the benchmark also depends on market trends over the next few years, an industry source said. If Petronas carries out a review, it may be open to use Tapis price assessments from various agencies, he said.
Those who argue against Brent as the sole benchmark said a buffet of markers could offer refiners a better hedging tool and allow players to trade on the arbitrage between markers. “One price marker is too simple and will allow another competitor into the market,” the industry source added.
That may open the door for Russia’s ESPO, a growing crude stream with output set to hit 1 million b/d by 2012. That would be a high enough volume for it to be a marker, said Andrew Reed, consultant at Energy Security Analysis in the US. Still, ESPO’s sulphur content, higher than some Asian sweet crude, may hinder its acceptance as a benchmark, he added.
It may be some time before a new benchmark garners acceptance, but change would come, traders said. “A transition period is better than nothing,” said a trader with a Northeast Asian refiner. “Up to last year some of the benchmarks did fail due to high volatility, so end users and suppliers wanted to change.”