Brent - Life on the Road Again

by Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

2017 will see the start of the process of decommissioning the iconic Brent oil production platforms in the UK sector of the North Sea.  The first of the four Brent platforms, Brent Bravo, first started producing oil from the underlying Brent field in 1976 and was followed by first production from Brent Delta (1977), Brent Alpha (1978) and Brent Charlie (1981).  The disappearance of the Brent platforms will be a very visible indication of change in the North Sea.  But could this also be a portent for the end of another iconic North Sea oil institution?

‘Brent’ is also the most widely used crude oil trading benchmark globally.  Traded as futures contracts on the Intercontinental Exchange (ICE) and NYMEX, Brent is currently used to price almost two thirds of the world’s internationally traded supplies of crude oil (including in certain US and Canadian markets and in the Middle East and in Asia).  Brent is attractive because it represents a significant and stable level of production which is controlled by a multiplicity of different producing companies (rather than any particular dominant supplier which might use it to set a market), because it is producing in a region traditionally free from overt government influence and because it is a maritime crude which is capable of truly international transportation and market consumption (compared, for example, to a landlocked crude oil like West Texas Intermediate (WTI)). 

Brent, in this context, means a light, sweet crude oil which was originally produced solely from the Brent field in the UK sector of the North Sea but which is now is a blend of crude oil production from several input sources. Developed by Shell, Brent was so-named after the company’s convention of naming all of its North Sea projects after sea-birds (in this case, the Brent goose) but is also thought to be a mnemonic for the key formation layers of the oilfield: Broom, Rannoch, Etive, Ness and Tarbert.

At its peak in 1982 the Brent field was producing just over 500,000 barrels of oil per day.   Such a large volume of production ensured good levels of physical liquidity for oil trading and made it a natural candidate as a price benchmark. Overall North Sea crude oil production has been in steady decline since the mid to late 1980s however and Brent production is no different.   By 1986 Brent field daily production was down to 400,000 barrels, and dropped further to 90,000 barrels by 1990.

In an attempt to arrest the decline and to shore up Brent’s price marker credentials, Brent production has been supplemented with crude oil of a similar quality produced from a number of other proximate sources over the years.  Ninian field production was added in 1990, followed later by crude oil from the Forties, Oseberg and Ekofisk fields. In recognition of this, Brent as a price marker today is properly known as ‘Brent Blend’.  Even this consolidated oil production is in decline though: Brent Blend production fell from 420,000 barrels per day in 2009, to 260,000 barrels per day in 2014.

The continuing decline in Brent Blend oil production had previously caused some commentators to question how long Brent should legitimately be allowed to retain its role as the pre-eminent crude oil pricing benchmark.  The expectation was that dwindling production was less likely to be replaced by other sources of proximate North Sea crude oil simply because the North Sea as a whole is a province in decline.  This month however Brent Blend confounded its critics by securing agreement that Norwegian crude oil production from the Troll field would be added into the mix.  Further down the road, even certain Danish, Urals and West African crudes could become part of the basket.

Brent Blend has cleverly reinvented itself with this slight shift in focus but perhaps the best prospect for its continuation as the leading crude oil price marker is that there are no other obvious candidates to replace it.  Brent Blend is transparent and widely used in international markets and is simply more attractive than aspirant benchmark prospects like the Asia Petroleum Price Index (APPI).  A possible pretender to Brent’s throne was the recent ambition of the Shanghai International Energy Exchange to launch a Yuan-based oil futures trading contract but progress slowed on introducing the contract at the end of 2016 and its future is by no means certain.

Brent Blend pricing today might not be the perfect facsimile of what it once was but it has proved itself to be creative and capable of regeneration.  Brent Blend will be around for the foreseeable future, and certainly so long after the production platforms which originally sourced it have been removed and scrapped.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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