Seemingly simple and descriptive information such as this, which can be found in several trade and standard press articles, does in fact take a by no means indifferent wealth of knowledge for granted and may leave a careful reader asking himself a number of questions. What is the Brent oil price? Why is it used as a benchmark for oil prices? Will it keep this role in the future? Without pretending to be exhaustive, we will try to provide some concrete answers to these questions.

The path of Brent

In 1971, Shell Exploration and Production (Shell ExPro) - a joint venture (50:50) between Shell UK and Exxon Exploration and Production - discovered an oil and gas field in the North Sea, more precisely off the north-east coast of Scotland, halfway between the Shetland Islands and Norway. This discovery was called Brent, in line with Shell UK's policy of naming all UK offshore oil fields found in the 1970s after seabirds. In this particular case, the choice fell on the Brent goose, a species of goose of the genus Branta which typically spends the winter months along the coasts of the North Sea and the Irish Sea.

Field production, which can undoubtedly be considered a milestone in the UK Oil & Gas industry, began in 1976 and since then, the term Brent has also been used to describe the quality of the oil extracted. But the first real "window on the world" opened in 1979 when, through a pipeline system named the Brent Pipeline System, cargoes of Brent began to reach the onshore Sullom Voe terminal in the Shetland Islands: this was the largest and most flexible export structure of its time and was particularly popular with refiners because it provided ample availability in terms of loading dates and could accommodate tankers of any tonnage or size.

But why did Brent become benchmark for crude oil, first for the European and then for the international market? Several elements came into play to favour its being selected as a benchmark:

• the excellent characteristics of its mix: it is a light crude (38° API) with a low sulphur content (0.4%) which make it possible to obtain high yields in terms of premium products such as petrol and diesel and low desulphurization costs
• close proximity to major European consumer markets: it was the first and largest oil field with access to Europe
• political, fiscal and regulatory stability of the producer country: the UK
• the flexibility provided by the Sullom Voe export terminal
• an adequate production volume, strengthened by the union of its flows with those of another oil quality - Ninian oil - produced in the same section of the North Sea by the BP/Chevron consortium and also handled by the Sullom Voe terminal
• growth in physical trading thanks to the launch of the 15 day Brent contract in 1986 by Shell UK: a standard contract for the purchase and sale of Brent cargoes which owes its name to the fact that the seller undertakes to communicate the actual delivery date of the cargo at least 15 days in advance.

This move by Shell, together with the technical and geographical characteristics of Brent oil, has favoured, since the 1980s, the creation of an important physical market, for both spot and forward deals, referring to this type of oil which, amongst other things, was not controlled by OPEC. Since then, the value of Brent published by specialized media agencies - and above all Platts, the oldest and best known of them all, with headquarters in New York - has become a reference for several other qualities of crude oil traded in the world, with their prices being defined by applying an increase (premium) or reduction (discount) differential, in relation to the price of the crude oil produced in the North Sea. Specifically, the reference value taken into consideration was (and still is) the so-called Brent dated, published every day by Platts and relative to physical North Sea oil cargoes to which specific delivery dates were assigned.

The importance of Brent was increased and its investiture as a benchmark was consolidated substantially by the launch, in 1988, of the first Brent futures contract on the International Petroleum Exchange (IPE), London's International Oil Exchange, incorporated in 2001 by the Intercontinental Commodities Exchange (ICE). Since 2012, Brent Futures contracts trading on the ICE are the most liquid of this type of contract in the world and the relative prices condition and are conditioned, according to complex and not always transparent mechanisms and dynamics, by the underlying physical market.

The path we have briefly outlined, also in the following timeline, has resulted in the Brent oil price over the years becoming both the physical and financial benchmark for two thirds of world oil trading. However, despite its growing popularity, an increasing number of doubts are emerging as to its future benchmarking capacity.

Will it keep this role in the future?

At the time of its discovery, the life expectancy of the Brent field was 25 years; however, continuous investments made in the '90s have extended its exploitation period way beyond initial expectations.  But sooner or later, with the decline in production it becomes necessary to take stock of the situation, especially if we are talking about a crude oil used as an international benchmark.  After the peak in 1984 - when the production of 430,000 bbl/d of Brent met the annual energy requirements of approximately half of all UK homes - production volumes have been declining. The decrease in available cargoes - in spite of the mix with Ninian since 1990 - reduces the liquidity of the physical market making deals more complex and increasing the vulnerability of the benchmark to possible speculative price distortions.

To remedy these obvious problems, in July 2002 the Brent market was "modified" to also include the Forties and Oseberg flows, two good quality oils, again extracted in the North Sea, in fields operated by Apache and Statoil respectively. It soon became evident, however, that this solution, no matter how effective, was only provisional. In June 2007, the trend of decline also in the newly added productions being confirmed, the basket was enriched with a new oil, the Norwegian Ekofisk, which brought overall production up to 1.4 MMbbl/d. This field is operated by ConocoPhillips. Since then, for the next 10 years, the evaluation of the Brent Dated has been known as the BFOE - Brent, Forties, Oseberg, Ekofisk basket - and its daily value has reflected the price of the most competitively priced oil, i.e. the lowest price of the four.

For 10 years, in fact. Already in 2015 the physical cargoes of BFOE were lower than 1 MMbbl/d, revealing the chronic nature of the decline in North Sea oil production and the need to further intervene to try and confirm the representativeness of the benchmark. Hence the recent announcement by the frequently appointed Platts, to proceed with a new revision: as of 1 January 2018, Troll will be added, the oil extracted from the field of the same name located off the Norwegian coast and operated by Statoil. In this way, the total cargoes of Brent Dated - now BFOET to take into account the latest addition - should be somewhere in the region of 1.2 MMbbl/d.

In addition to allowing greater liquidity of the physical market - with positive effects also on financial trading within the ICE circuit - the addition of Troll brings with it a major change in the Brent basket shareholder structure:  the Norwegian company Statoil in fact becomes the main supplier of oil in the mix overtaking Shell, which up until now had held the dominant role in North Sea trading. With the new subdivision of supplies no company holds more than a quarter of the total production.  But also this time, the addition of Troll won't be enough to solve the liquidity problems of the Brent market: according to the main forecasts on this matter, the decline in productivity in the North Sea fields is unstoppable and the overall volume of the five oils included in the baskets will have dropped to about 500,000 bbl/d by 2025.

In addition, one can not overlook the imminent exhaustion of production in the Brent field, the field which started it all. After 40 years of operation, in 2006 Shell started the preparatory work for the removal, or more technical term decommissioning of the 4 platforms and 154 wells connected to the field, from which only a few hundred barrels of oil are extracted a day.
That being the case, there is no point making any hypothesis on the introduction of new qualities in the Brent basket, even from outside the North Sea extraction area. Among these is Shell's recent proposal to Platts to assess the addition of oil from the Russian Urals which, despite being of medium quality and sulphorous, could be an ideal candidate as it is perfectly suited to the plant design of refineries in North-Western Europe and is consequently in high demand. At the basis of the Shell proposal, there is always the intention to safeguard the representativeness of the Brent benchmark that could soon be affected by another factor, other then just the decline in North Sea productivity: the comeback of the WTI.  But let's take a step back and try and understand what the WTI is and why there is talk of a possible comeback.

The duel with the WTI

As we have seen, the importance of Brent as a benchmark for oil prices was already clear in the 1980s, shortly after it came into production. However, despite the fact that it was the crude oil against which most oil traded on a global scale was priced, up until 2011 its role - or rather its reputation - remained secondary to that of West Texas Intermediate (WTI in its abbreviated form): a high quality mix of oils produced in different areas of the United States and stored at the Cushing terminal in Oklahoma. In fact the WTI price - benchmark value for crude consumed in the United States - was often identified collectively as world oil.  The trend was similar to that of Brent, compared to which it had an average premium - between 2000 and 2010 - of nearly 1.5 USD/bbl.  In 2011, however, the differential between the two prices was not only inverted, but progressively and significantly widened: in that year, the average price of North Sea oil was 16 USD/bbl higher than American oil, undermining the beliefs about the representativeness of the WTI as a global benchmark.

What happened?  The WTI had disengaged itself from the international dynamics of the oil market and was responding to purely domestic logic: the increase in production determined by the new unconventional production of shale oil had caused an excess in supply that could not be absorbed through oil exports, prohibited - in the United States - since 1975.  This encouraged a strong growth in stocks held at the Cushing terminal, where other types of oil were also arriving - albeit of lower quality, such as the Canadian oil sands - representing the largest volume of the oil fields.  In summary, while on the international oil market the Arab Spring raged, with internal crises in major Middle East and North African producer countries, US crude showed purely local dynamics and did not reflect the tensions of the global market.  It could therefore no longer be considered a good indicator of the world oil price.  

However, in recent years, the price differential between Brent and WTI has been strongly reduced and the two oils have resumed following similar trends, despite the North Sea reference being listed as premium over US oil.  Then, in 2016 the ban on exporting oil from the United States was lifted, in response to changes caused by the shale revolution, triggering the hypothesis of a possible return of WTI as a world benchmark.

If, in the medium term, resorting to a valid alternative to the Brent price seems unlikely, over the longer term there are a whole number of hypotheses.  In addition to the renewed interest in US oil, several analysts fear completely new solutions, including the identification of an Asian benchmark, given the increasing share of world demand absorbed by this area, or even the complete overhaul of the current price system in response to a market of constant and marked change. In the meantime, for a while, the benchmark will be the Brent basket, even when it is "Brent-less."

Article by Rie in collaboration with Agi