COLUMN-Nexen buy moves China into heart of global oil benchmark: Campbell

Mon Jul 23, 2012 3:58pm BST

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 (Robert Campbell is a Reuters market analyst. The views
expressed are his own)
 By Robert Campbell
 NEW YORK, July 23 (Reuters) - Chinese state-backed oil
producer CNOOC Ltd will get more than just more crude
oil assets with its $15.1 billion takeover of Canada's Nexen Inc
.
 The acquisition will also move CNOOC into the heart of the
North Sea BFOE physical oil benchmark, giving a Chinese company
for the first time unprecedented insight and access into this
secretive, yet enormously influential market.
 Much of the oil traded worldwide is priced with reference to
"Dated Brent," a daily price assessed by McGraw Hill unit Platts
 using the relative values of Brent, Forties, Oseberg and
Ekofisk (BFOE) crude oil blends in the North Sea.
 Although these four grades amount to roughly only 1 percent
of world oil production, they have a huge influence over the
price of crude worldwide because Dated Brent is used as the
benchmark for the price of most globally-traded grades of oil.
 And because Forties, which is generally the cheapest of the
four grades due to quality differences, usually sets the Dated
Brent price, it is the most influential grade of crude oil in
the BFOE market.
 Nexen operates the 210,000 barrels per day capacity Buzzard
oil field, the largest contributor to the Forties oil blend.
 Once the takeover is complete, CNOOC will become the
operator, gaining a critical role at the heart of the world oil
pricing system.
 The ownership stake in Buzzard will give CNOOC equity
cargoes of Forties, allowing it to actively trade in the
so-called 25-day BFOE forward market that sets the Dated Brent
price.
 More valuable than equity cargoes, given the decline in
North Sea supplies and the growing susceptibility of the Brent
market to temporary distortions due to falling liquidity, will
be the critical market intelligence on the supply situation in
the North Sea that CNOOC will obtain.
 Foreknowledge of North Sea supply dispositions will give
CNOOC a leg up in its trading operations, not only in the North
Sea, but worldwide, should the company choose to make use of
what it will be learning.
 Of course, there is nothing illegal or suspicious here. 
 This system has long benefited the established oil majors
like Shell and BP who use their knowledge of
North Sea production to trade both physical and financial
products linked to the Dated Brent assessment, including Brent
crude futures.
 But it does mark a major step for China's emerging oil
industry and one that is consistent with Beijing's broader
energy sector goals.
 Instead of being a pure price taker, China will have some
insight into short term fundamental shifts that affects either
directly or indirectly the cost of the oil the country must
import.
 
 REASON TO WORRY?
 A Chinese presence in the heart of the oil price setting
mechanism that governs most of the world's crude trade will be
unsettling to some.
 But it would be premature to conclude that Beijing will
start to manipulate oil prices to its advantage once the Nexen
takeover is complete.
 For one thing, Nexen's share of Forties production from
Buzzard amounts to roughly four cargoes a month, which is hardly
enough to corner the Brent market.
 Moreover the structural weaknesses in Brent make it more
susceptible to upward squeezes. Because of the natural decline
in North Sea production, there are sometimes too many buyers
chasing too few barrels linked to the Dated Brent market.
 That makes it easy for a savvy trader to accumulate enough
cargoes from a monthly loading program to trigger a short
squeeze that sends Brent prices temporarily higher.
 But China, as a major oil importer, is unlikely to want to
see crude prices pushed up. 
 Lower prices are more likely to be its goal. But pushing
Brent prices down is a much more challenging proposition because
of the latent upward skew in BFOE. 
 CNOOC could, perhaps, load up on North Sea cargoes and then
dump them on the market to depress the Dated Brent benchmark.
 However the cost of such an operation would likely outweigh
savings achieved elsewhere, particularly if the preparatory
accumulation of other BFOE cargoes initially prompted Brent
prices to spike.
 A more likely scenario is CNOOC using its foreknowledge of
maintenance shutdowns to play the Brent crude oil futures market
to its advantage. 
 Brent futures have already shown a remarkable responsiveness
to short-term movements in the North Sea market and offer a
legal route to higher profits from North Sea production.
 But the real advantage that may accrue to CNOOC from the
Nexen acquisition may have more to do with the future of Dated
Brent than the present market structure.
 The susceptibility of the benchmark to short-term
distortions is well known and efforts are already underway to
find ways to improve the structure of the market.
 Now CNOOC will have a seat at the table as discussions
between the North Sea industry, price reporting agencies and
regulators continue over the future of the benchmark.

 (Editing by New York desk)
 
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