Royal Dutch Shell Plc, the world’s largest oil trader, said the time has come to debate using Russian crude to help determine the global Brent benchmark.
Such a move would be the most radical shift in how European prices are calculated since the 1970s.
Mike Muller, the head of crude trading at Shell, said at the Platts Global Crude Oil Summit in London that he wants a discussion about calculating the price in Europe using not just oil pumped in the North Sea — as has been the case since the 1970s — but potentially including Russian crude and even grades pumped in West Africa and the Caspian Sea basin.
Shell is not just the largest oil trader but also the custodian of the master contract that governs the physical Brent market, and as such its views are closely watched.
Though Muller said some of the suggestions he floated were “concepts and ideas,” he made clear that the company wanted to see reform. “These are the sort of things Shell wishes to see in benchmarks going forward,” he said. Any further changes should be implemented “in a matter of years, not necessarily months, to ensure a soundly functioning market is maintained.”
The rest of the market would have to concur that the changes outlined were appropriate. Oil industry executives largely agree that the Brent benchmark will need significant reforms early next decade.
Industry Input
In 2014, Ian Taylor, the chief executive officer of the world’s biggest independent trader Vitol Group said he was “extremely concerned” about the possibility of Brent becoming a less-efficient or effective benchmark. Crude from Africa, the Caspian Sea and possibly Russia should be added to the basket of oil used to determine the price, he said at the time.
Muller said that the large amounts of Russian Urals crude that Europe’s refineries use meant it was worth talking about using the grade as part of the region’s benchmark.
“Some form of incorporation of Urals will undoubtedly need to be discussed on merit,” he said, adding that doing so may help improve the price-discovery process. “If you had to pick one grade of crude, Urals is the one which northwest European refineries should be designed to run optimally.”
It’s difficult to see how more North Sea oil grades can be added to the current benchmark, Muller said. It now comprises Brent, Forties, Oseberg and Ekofisk and will add Troll from 2018.
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