NEW YORK: 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.
— Robert Campbell is a Reuters market analyst. The views expressed are his own.
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.
— Robert Campbell is a Reuters market analyst. The views expressed are his own.
Nexen buy moves China into heart of global oil benchmark
