One of the most dominant conversation topics in the crude world over the last several years has been the declining production profile in the North Sea region.
North Sea grades—and particularly the light, sweet, distillate-rich crudes that have dominated regional production historically—have formed the backbone of the Dated Brent assessment.
However, as the region has matured, production has begun to decline.
This has happened more slowly perhaps than expected, particularly given the low price environment that has hampered regional investment for the last three years or so.
While a lot of the market chatter around this has quite reasonably centered on the possible impact this will have on the basket that makes up Dated Brent, it's important to note these declines have not been limited to Brent, Forties, Oseberg and Ekofisk (BFOE), but have been consistent across the North Sea region.
Furthermore, most of the newer discoveries in the North Sea over the last decade have differed from the “light, sweet” style that has been synonymous with the region.
The newer grades are overwhelmingly more heavy, more sour and—perhaps most importantly—more acidic than the classic BFOE grades. Over the years, a number of regional grades, current and future, have been suggested—both by S&P Global Platts and by the market—as possible additions to BFOE moving forward.
Platts has always taken the view that the best solution moving forward to liquidity in the FOB Dated Brent market should lie within the North Sea region. This position is shared by much of the market at large.
It's become increasingly clear that there is no perfect solution, but there are a number of possible solutions that can be adapted moving forward.
When looking at what grades should be included in the Dated Brent basket, Platts looks at a number of different factors including: a diversity of buyers and destinations; stable grade quality; a steady and reliable production rate; that a given grade is not subject to undue political influence; and that it contains a long-term, stable production profile.
Considering Norway's Troll for the Brent basket
Consequently, Platts has started looking more closely at the role that Norway's Troll can play in BFOE moving forward. Troll is a light, sweet distillate-rich crude grade with a healthy production profile of 240,000 b/d that, coincidentally, prices quite neatly into Dated Brent.
However, it differs from the rest of the BFOE complex in one key way: its acid content.
Historically, this has seemed an insurmountable barrier to adding Troll to the BFOE basket. But as the refining pool in Europe has upgraded and diversified, it's looking like much less of an issue than it used to be.
The acidity of crude oil has traditionally been an area of concern for refiners. Crude oil with a higher TAN, that is to say Total Acid Number, has the potential to be more corrosive to the component parts of a refinery than the more prominently known low acidity crude that has historically been produced in the North Sea.
There is no generally measurable relationship between TAN and the detrimental impact on a refinery.
However, it is Platts understanding that crude with a TAN measured above 1 is treated with more caution by European refiners. These grades are not considered suitable refinery feedstock by many facilities without significant levels of blending with other lower TAN crudes or chemical treatment to mitigate the impact of acidity.
In the case of Troll, with a TAN of 0.7, it is considered only moderately more acidic than what is understood to be the low TAN upper limit of 0.5.
Moreover, compared to other more acidic crudes, such as Heidrun and Grane, if Troll is blended even with small volumes of a lower TAN crude oil (in this case Forties), the acidity of the created refinery feedstock quickly falls below what is considered the low TAN upper limit. As such, it is Platts understanding that it remains suitable feedstock for Europe's refiners and fully fungible in crude oil markets.
The addition of Troll to the Dated Brent basket helps to allay the projected production declines in BFOE, and would add a healthy volume through to 2019.
Platts is opening a formal review of additional crudes for Dated Brent and soliciting feedback in particular for the addition of Norway's Troll to the basket of crudes reflected in its Dated Brent FOB North Sea and Dated Brent CIF Rotterdam assessments, as well as its Cash BFOE assessment.
Comments on the proposed change are being accepted until January 31. Please send comments to: firstname.lastname@example.org.
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