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Welcome London, UK May 9, 2002 Dorchester Hotel


Panelists Neil Fleming, VP Information & Trading Services Jorge Montepeque, Director Market Reporting Gerald Bueshel, Global Crude Oil Manager/Markets Manager, New York Peter Stewart, Manager Oil, Europe Paul Young, Executive Editor European Markets


Agenda Production decline affects benchmarks Volume injection to revitalize benchmarks Description of volume injection mechanism Potential market implications Q & A session

The Issues: 

The Issues Brent production declines Full month programs are squeezed IPE and 15-day Brent disconnect from the value of similar commodities IPE Brent and NYMEX WTI narrow excessively Dated Brent price appears distorted vis-à-vis other similar commodities Brent ceases to reflect market conditions in the North Sea

Definition of Problem: 

Definition of Problem Is there a problem? Yes, all instruments that derive their value from the physical Brent production are squeezable What is the core problem? There is insufficient production of Brent, and hence Brent instruments have become disconnected from similar commodities Where is the problem manifested? In dated Brent, paper Brent and all its derivatives

Physical Brent liquidity problems: 

Physical Brent liquidity problems Fact: Brent production declines, which makes market squeezes easier Option: Consideration of other physical North Sea grades (e.g. Forties) for Dated Brent assessment purposes Advantage: Pool of potentially 65-90 cargoes/month for key benchmark assessment Implementation: Following consultation with the industry

Brent production: A steady decline: 

Brent production: A steady decline 1999: UK July Brent throughput seen at 568,806 b/d: Shell The average throughput of UK Brent Blend in July is expected to be 568,806 b/d, operator Shell said Thursday. The throughput estimate now covers co-mingled crude from the Brent System and Ninian System pipelines delivered to Sullom Voe in Shetland, Shell noted. Throughput for the year up to the end of May was 570,021 b/d. The July estimate is based on information available at present and is subject to the progress of maintenance work, associated engineering and normal operational considerations, Shell said. 2002: UK May Brent throughput seen at 360,000 b/d: Shell The average throughput of UK Brent Blend crude in May is expected to be around 360,000 b/d, operator Shell said Tuesday. The throughput estimate covers co-mingled crude from the Brent System and Ninian System pipelines delivered to Sullom Voe in Shetland, Shell noted. Average throughput for the year up to the end of March was 385,309 b/d. The May estimate is based on information available at present and is subject to the progress of maintenance work, associated engineering and normal operational considerations, Shell said.

Dated Brent versus Long Dated Brent: Underlying lack of volume remains : 

Dated Brent versus Long Dated Brent: Underlying lack of volume remains

Brent lawsuit: Tosco vs. Arcadia: 

Brent lawsuit: Tosco vs. Arcadia

Regulatory initiatives: Financial Services Authority: 

Regulatory initiatives: Financial Services Authority Brent market within regulatory ambit of UK's FSA London (Platts)--29Apr2002/511 am EDT/911 GMT The UK's Financial Services Authority said Friday that, in its view, squeezes on the Brent market or any such activity that results in price distortion in this market, fall within its regulatory ambit. Responsibility for regulating the Brent crude market has in the past been a grey area. Traders note that a new code of conduct put in place early this year by the FSA may expose companies to legal action if they hold a "dominant" position or cause a distortion in an investing instrument. An FSA official said that the code of conduct applies to exchange instruments such as IPE futures or "other instruments that provide value or derive value from the IPE." By most accounts 15-day Brent would therefore fall under the guidelines of the FSA.

Industry initiatives: Shell zeroes in on operational tolerance: 

Industry initiatives: Shell zeroes in on operational tolerance MH0379 Shell cuts Brent contract operational tolerance to 1% New York (Platts)--24Apr2002/923 am EDT/1323 GMT Shell Thursday said it was cutting the operational tolerance on 15-day Brent crude contracts to 1% from the previous level of 5% with immediate effect. The change will apply to all cargoes loading in January 2003 or later, Shell said. The change has been made as an amendment to the 1990 Agreement for the Sale of Brent Blend Crude Oil on 15-Day Terms (Part 2), Shell said. The cargo size in the 15-day Brent market is 500,000 bbl, with the buyer currently having the right to nominate an actual volume of between 475,000-525,000 b/d, representing an operational tolerance of plus or minus 5%. The change to cut this figure to 1% means nominations will have to be between 495,000-505,000 bbl. Shell said it believed the reduction would "encourage liquidity and increase transparency in the Brent market." Shell is the operator of the UK North Sea Brent complex.

Industry initiatives: Shell’s move opens floodgates: 

Industry initiatives: Shell’s move opens floodgates Brent cash market starts to move to 1% tolerance level London (Platts)--1May2002/740 am EDT/1140 GMT The Brent crude cash market has already started to migrate towards 1% commercial tolerance on cargo sizes, and a complete switch to the new tolerance band could happen far earlier than initially anticipated, trading sources reported Wednesday. Shell last week announced a reduction in the operational tolerance of Brent cargoes from 5% to 1%, effective on all cargoes from January 2003. Only one deal has been confirmed so far on 1% tolerance--a Sep/Oct concluded Tuesday at +26 cts--but Jun/Jul, Jul/Aug and Aug/Sep were all offered early Wednesday on a 1%-tolerance basis. In addition, sources said, there had been a number of discussions to convert existing 2002 Brent positions based on the older tolerance level of 5% to the new 1% level.

Dated Brent Differential to Ekofisk: 

Dated Brent Differential to Ekofisk

Feb/Mar IPE Brent Spread: 

Feb/Mar IPE Brent Spread IPE EFP

May/June IPE Brent Spread: 

May/June IPE Brent Spread





Dated to June Brent Differentials Forties to dated Brent Spread: 

Dated to June Brent Differentials Forties to dated Brent Spread Scapa Flow Brent

Finding a Solution: 

Finding a Solution What is the solution to low Brent production volume? Inject volume through alternative crude delivery What alternative grades? Oseberg and Forties Why those grades? Oseberg and Forties bear close resemblance to Brent Where would the volume injection take place? In the paper Brent, dated Brent market and derivatives

Alternative grade injection: 

Alternative grade injection Injection of volume to revitalize dated and pre-dated instruments. Injection to encompass all faces of Brent markets that derive their value from the underlying physical Brent production. Alternative grades to be injected at par with Brent

Equity ownership: 

Equity ownership

Average Crude Values from January 2000: 

Average Crude Values from January 2000

Editorial Volume Injection: 

Editorial Volume Injection How would the alternative grades be injected into the Brent benchmark? Through acceptability of alternative grades for the dated Brent assessment process How would the system actually work? Platts would implement, at a future date, three editorial Brent assessment changes

Three editorial changes to the Brent assessments: 

Three editorial changes to the Brent assessments Elimination of commercial tolerance Declaration of dates/grades 21 days in advance Substitutability of Oseberg and Forties into Brent -dated and pre-dated instruments- for assessment purposes.

Elimination of commercial tolerance: 

Elimination of commercial tolerance Platts would consider for its forward Brent assessments (aka paper, cash Brent), transactions effected with zero commercial tolerance and with a maximum of 1% -plus or minus- for actual terminal operational tolerance.

21-day advance declaration: 

21-day advance declaration Platts would consider into its forward Brent assessments, transactions where seller has the obligation to declare grade and dates 21 days in advance of loading. Grades aceptable are Brent, Oseberg and Forties

Grade substitution in the Dated Market: 

Grade substitution in the Dated Market Platts would consider for its dated Brent assessments alternative grades loading 10-21 days forward, specifically Oseberg and Forties besides Brent. Platts would consider bids and offers made on an any dated Brent basis, where seller has the obligation to declare the grade at time of execution. Platts would consider specific grade bids and offers and would reflect the broader North Sea trading fundamentals in its assessments


Precedents Brent is already a physical blend NYMEX light crude has optional grade delivery Oman was injected into the Dubai assessment Several contracts have 0% commercial tolerance Window of assessment has been changed in other markers

Mechanism for substitute delivery: 

Mechanism for substitute delivery Seller offers dated Brent and has right to declare grade at time of execution. Buyer bids for dated Brent and has obligation to accept any grade at time of execution. Seller offers ‘only’ dated Brent. Buyers bids ‘only’ dated Brent. Offer valid for assessment purposes unless specific grade bids surpass value of offer. Bid valid for assessment purpose. Offer valid if most competitive among similar grades. Bid valid if value has not crossed those of similar grades

Brent Assessment Example: 

Brent Assessment Example Company A buys 21-day Brent loading in June at $25.00/bbl from company B. Company A is declared Forties loading June 21-23 on May 31. Company A offers dated Forties June 21-23 at June plus 10 cts. Company C offers dated Oseberg June 21-23 at June plus 5 cts. Company D bids any dated Brent June 21-23 at June flat. Assessment value for June 21-23 = June 0/+5 cts

Impact of Proposal: 

Impact of Proposal Value of Brent benchmark would reflect broader North Sea light crude fundamentals

Expected effects of Brent proposals: 

Expected effects of Brent proposals More harmony in trading windows with other Atlantic Basin grades. This would enable players to better optimize grades. The option to deliver other grades into forward paper contract would reduce the possibility of a squeeze in Brent prior to expiration. Brent/Dubai spread would contract. Brent/WTI would widen. Forward and futures differentials would narrow. Forward and dated Brent would diverge less. Implied backwardation would ease.


Requests Some participants have requested cargo size to be redefined to 600,000 bbls. More detail on Scapa Flow Brent , Oseberg or Forties delivery. Greater monitoring of performance, including operations, after cargo has been bought/sold. Establish deadline for valid bid/offers for dated Brent, Oseberg, Forties. Move Brent assessment window to a close of business during European time.

Assessments Structure to Remain Unchanged: 

Assessments Structure to Remain Unchanged BrentMAY 26.00-26.02 Dubai(JUL) 24.51-24.56 BrentJUN 25.53-25.54 Dubai(AUG) 24.20-24.27 BrentJUL 25.62-25.65 Dubai(SEP) 23.93-24.02 Brent(Dtd) 25.84-25.86 LD Brent 25.74-25.75 Oman(JUL) 24.56-24.65 NS Basket 25.34-25.39 Oman(AUG) 24.33-24.44 Forties 25.19-25.26 Oman(SEP) 24.08-24.20 Ekofisk 25.09-25.16 Statfjord 25.04-25.11 Oman(JUL)MOG 0.06- 0.08 Oseberg 25.24-25.31 Oman(AUG)MOG 0.07- 0.09 Flotta 24.57-24.63 Oman(SEP)MOG 0.06- 0.07

Dubai Inter-month Differentials: 

Dubai Inter-month Differentials

Oman Behavior Changes: 

Oman Behavior Changes


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