Bloomberg News

North Sea Leak May Deny Brent Crude Relief From Libya’s Return

March 28, 2012

The halt of Total SA (FP)’s Elgin platform in the North Sea after a gas leak may deny the Brent crude market the relief that was set to come with resurgent Libyan oil exports, according to BNP Paribas SA.

Total said yesterday it would take at least six months to drill an emergency well to staunch escaping gases unless the matter resolves itself in a matter of days. Royal Dutch Shell Plc shut down the neighboring Shearwater field after a two-mile exclusion zone was declared. The Elgin-Franklin fields off the coast of Scotland provide about 15 percent of the Forties blend, one of the crudes used to price the Dated Brent benchmark for more than half the world’s oil.

Brent crude prices, which would have been tempered by increasing shipments from Libya, are more likely to maintain a structure signaling limited prompt supply as a result of the North Sea oil field halts, BNP Paribas said. Immediate supplies have been costlier than later deliveries, a market structure known as backwardation, since mid-January.

“This throws an interesting spanner in the works of those who were thinking that the front end of the Brent curve would soften as a result of the return of Libyan oil,” Harry Tchilinguirian, the London-based head of commodity markets strategy at BNP Paribas, said yesterday in a phone interview. “The likelihood is that Brent retains its backwardation despite the full return of light Libyan oil on the market.”

Backwardation to Widen

Brent for settlement in May, at $124.78 a barrel, is 69 cents more expensive than those for June settlement, according to data from the ICE Futures Europe as of 8:14 a.m. in London. The backwardation between first- and second-month Brent contracts has averaged 52 cents this year.

The front month’s premium may increase, according to Olivier Jakob, managing director at consultants Petromatrix GmbH in Zug, Switzerland.

“In the high price environment that we are currently in, you don’t want to lose any local production,” said Jakob. “Brent has stayed in backwardation and this is going to push it further.”

The Elgin-Franklin disruptions come after the deferral of Forties cargoes as a result of a platform upgrade at Nexen Inc.’s Buzzard oilfield, which is the biggest contributor to the Forties blend, Tchilinguirian said.

Buzzard Issues

“Absent the outages at the Buzzard field or at Elgin, we’d have expected a softening of the backwardation in the Brent curve,” he said.

The Elgin-Franklin fields produced a daily average of 61,386 barrels of condensate in November, according to the most recent government data. The Buzzard field as an output capacity of about 200,000 barrels a day.

“The outage at Elgin may compound strength afforded to the Brent complex by issues we’ve seen at Buzzard, notably a further deferral of cargoes,” according to Tchilinguirian. “There’s potential for a steepening backwardation in Brent should we get additional cargoes deferred on top of those that have already been deferred at the Buzzard field.”

The disruption may also temporarily widen the price difference between North Sea Brent and the U.S. benchmark crude, West Texas Intermediate, according to Roy Jordan, a consultant at Facts Global Energy Inc. in London. Brent was $18.25 a barrel more than WTI today.

“It could very well widen Brent-WTI, but in time other things will be more significant,” said Jordan. “It’s possible it will affect the Brent price because it’s a contributor to the Forties blend, but more because of a knee-jerk reaction than a considered view of its importance.”

Total is the operator of Elgin-Franklin. Other shareholders are Eni SpA, BG Group Plc, EON AG, Exxon Mobil Corp., Chevron Corp, Dyas AS and Summit Petroleum Ltd.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net


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