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In the second of a two-parter, we discuss Mark’s recollections of Brent reform in the early 2000s, and we get his verdict on the benchmark’s remarkable survival story.
Welcome to The Price of Everything, a podcast that aims to shine a light on pricing. The cost of commodities – energy, food, etc. – play such an important role in our lives: accounting for around $5trillion worth of worldwide trade. But how are those prices actually calculated? Why do they move up and down so much? And what’s next?
The Price of Everything is the first podcast dedicated purely to how pricing works. Introduced by Neil Bradford, Founder & CEO of General Index (GX), and hosted by David Elward, Senior Pricing Analyst at GX, The Price of Everything takes listeners through how the world’s commodities are priced and what the future looks like for them in the age of climate change and the energy transition.
In this second series, we’re exploring the new markets coming to prominence, and how commoditisation in those sectors – hydrogen, voluntary carbon, sustainable aviation fuel and others – is often elusive; pricing and standards far less well defined; and value derived by their capacity to help combat climate change.
Neil:
Hello and welcome to The Price of Everything, a podcast that aims to shine a light on pricing.
The cost of commodities, that's energy, food, and so on, is such an important part of our lives. But how are those prices actually calculated? Why do they move up and down quite so much? And what's next?
The Price of Everything is the first podcast dedicated purely to how pricing works. My name is Neil Bradford, and I'm the Founder and CEO of General Index, which is the world's first technology-led benchmark provider. Together with my colleagues from around the world, and some special guests, we'll be taking you through how some of the world's most important commodities come to be priced, and what the future looks like for them in the age of climate change and the energy transition.
Dated Brent is the world's most widely recognised price for crude oil. But why Brent? How did an oilfield off the coast of Scotland become so pivotal in global oil pricing?
My colleague, David Ellwood, explores the history.
David:
Thanks, Neil. I've been speaking to Mark Quartermain, ex-Head of Crude Oil Trading at Shell. If you've not already listened to the first part, probably best to go check that one out first. You'll find a link in the show notes.
In this second part, I ask Mark about the advantages and challenges trading for an integrated oil company. We discuss his role in the evolution of the Brent benchmarks, when the basket expanded to add other North Sea grades, and he reflects on Brent's staying power.
But first, Mark's about to tell us how the standardisation of the Brent Market made it possible to trade hundreds of millions of dollars worth of crude from a beach on the south coast of England. Let's rejoin the conversation.
Mark:
The forward market and the GT&Cs that we had in Brent meant it was much, much easier to trade cargoes of Brent than maybe some other commodities. Indeed, I once traded six cargoes of forward Brent on a cold, south of England beach on Boxing Day, December 26th, when much of the world was still open for business. That was a $100 million worth of crude, traded in about three minutes.
I remember my wife saying, "So you've actually just sold six cargos of crude?" Three little kids were around at that point in time. Yeah, yeah, it was possible because all you basically had to agree was the price, the month, the counterparty, the GT&Cs, just the reference to those GT&Cs, and the normal credit conditions. That was about the year 2000.
So things, obviously, have changed since then. But in terms of where and when you can do your trades and perhaps a little bit more structure around that then. But yeah, it worked, the six cargos flowed and we got paid and everything else. It was an indication of just how easy it is to trade when you have that common, standard agreement on 99% of the terms and conditions of a deal. It made it really, really easy to do business very, very quickly. That was just one anecdote from that point in time.
Of course, I think it's worth adding, everything was made simple by Brent being Brent. There was no quality conditions to agree. Unlike a products contract with sulphur, vanadium, asphaltene, FlashPoint, CloudPoint, depending on which fraction of the oil barrels' refined products you're dealing with, you didn't have any of that. You just called it Brent, and that was it.
It's almost like buying a particular fast food from a restaurant without advertising any one in particular, but you know what you are getting, for example. That's one of the appeals of going to that particular restaurant. Well, that was the case almost with buying Brent. You knew exactly what you were getting without having to respecify lots and lots of other quality conditions.
David:
That's really interesting because I know that we'll come onto in a little while, well, I'll get you at the end, some of your reflections on Brent, the benchmark, and what made it so successful.
Brent crude, it was a highly fungible product.
Mark:
Indeed, in the sense that I would describe a middle ground crude as something that most refineries could actually could process. Yeah, unlike certain crudes, where perhaps they may be particularly heavy or particularly light, you might have something which at the light end, a condensate, which could only be run through certain facilities. Or you might have a particularly heavy crude that could only be run through a refinery that had, for example, a coker, which in the UK at that particular point in time, there was only one.
Brent was a crude that was very, I would describe as accessible perhaps rather than fungible, David. It was something that most people could play with. Perhaps we can go into this in due course, it had certain other qualities, both in terms of its location and its quality, that were important to, I think, its sustained success.
David:
Okay. We'll come onto some of those other qualities in a little while because I know we're going to talk about how the benchmark developed.
But first, perhaps, just a word. So shell was, I mean, we can go technical, but it was a large company, right?
Mark:
Yeah.
David:
With a huge system, what we would call an integrated oil company. Now, how did the role of an IOC and your role with Shell differ from other traders around this period? Perhaps, I mean, if you were to break it down, you could give us what were some of the challenges or advantages of trading after an integrated oil company?
Mark:
Yeah. I think the first thing that's really important to say is that, as I'm sure it's the case today, but I don't think all IOCs were the same in the late 1990s. In fact, I can say that with a great deal of confidence, my memory isn't fading that quickly. We were very different.
Exxon didn't really trade. Huge emphasis from Exxon on value chain integration. So for them, it was almost matching up all their supplies and purchases. Conoco, a little bit more adventurous. Total and BP were towards the other end of the spectrum by pretty much common agreement and we moved towards that end, the same end as occupied by Total and BP, after the SMI structure was established. That meant we were in position to be more adventurous, I would describe, with our trading on a global basis.
But generally, the challenges for the IOCs were the same. They would've been more bureaucratic than perhaps other market participants. Although I will certainly add, just in case any old bosses are listening to this call, all the great credit to the Shell management that existed post-integration, because they certainly did everything they possibly could to try and reduce that gap around bureaucracy and make sure that whilst we took a compliance ever so seriously, we could get things done as was necessary in a fast moving market.
On the flip side, of course, that was one of the challenges. But the advantages where you had information from right across the value chain. I go back to my earlier career, having, knowing what refineries did, knowing my marketing side of the business, meant that if you had people in place who had the contacts in other parts of the value chain within the company and had experience in those parts of the value chain, you could knit that information together really quickly.
You, of course, had to stay within the regulations, like all market participants when it came to material issues like inside information. If, for example, a particularly important platform went down, we had to behave in certain ways. Compliance around that issue was rightly treated very, very seriously, and, in fact, was critical to the sustainability of the benchmark. That's one reason why I think it has again, succeeded for as long as it has, because people did take that very seriously.
But you even allowing for that necessity, you still had, of course, a good fundamental insight on the supply demand picture from the rest of the business. All IOCs had that benefit, and they had the potential benefits of scale, the options to place cargoes that all of a sudden didn't have a home, presence in all parts of the value chain. Also, I guess, versus I will just say, some players at the edge of the market, they had a bit more credibility when it came to performing on the contractual obligations, which go with buying and selling these large value cargoes of crude.
David:
Mark, we have touched various stages on Brent, but we're going to dive right into a little bit more of a discussion on the benchmark and your exposure to it. So we haven't gone through your LinkedIn jobs chronology one by one, but towards the end of the '90s, was it, or the turn of the '90s, you were North Sea Crude Manager?
Mark:
That's correct, David, yes.
David:
Yeah. So how key in that role... I mean, it seems like a silly question because obviously the answer is, "It's going to be very key." But how key was Brent? Perhaps you can unpack for us, how key was Brent to your remit in that role/ and were you also able to keep a bit of a broader eye on things beyond the North Sea?
Mark:
Yeah, no, thank you, David. It was really, really important to the remit. It was the benchmark, of course, for many crudes in the Atlantic Basin and beyond. So other desks, beyond the North Sea desks, really wanted to understand at all times what was going on with the Brent pricing complex, what was going on with the CFDs, what was going on with the forward market structure. Because they were maybe buying and selling their West African crude or their high sulphur crude in some instances, based upon future pricing dates for crude.
Of course, we talked about early in my career, my issue selling fuel oil cargo off PRA fuel oil quotes two weeks into the future, then the problems I hit. Well, guess what? The other desks wanted to understand what we thought about selling cargoes off certain dates and so forth.
Perhaps one thing is not necessarily obvious to every single one of your listeners was that much of the time, the people around me, what was much more important to them was what was going on with the CFDs, the contract for inferences, what was going on with the forward market structure, the future of the dated price for the next few weeks. That was much more important to them well than what the outright price was.
We very rarely, in Shell and I think that many of the other trading companies, had intentional exposure to outright price. The price of crude was subject to so many forces that we couldn't foresee, macroeconomics, et cetera, that that really wasn't a place that we really willingly had exposure to.
So many of the other desks, first of all, they didn't want to have exposure to it, and then they could hedge their exposure away by using futures contracts, for example, to buy and sell fixed price derivatives or futures. So they really cared about the structure, whether the market was in contango or backwardation, that was something they cared a great deal more about. That was something, because it was much more fundamentally based, was something that we had much more of a clue about where the market was going to be developing.
Of course, our refining and production parts of the business, they were also constantly interested in our views on Brent, both in the short term and the long term. So we had lots of things that we had to do. But if we didn't have our eye on Brent, then somebody would be upset with us.
David:
I mean, I was just thinking mean in terms of how practically you were all based in the same office, in London at this time?
Mark:
Well, indeed, we were based in offices at various parts of the world, but a lot... Well, when I was certainly North Sea Manager, the key desk managers were all based in London, are pretty close by. Yes.
David:
Obviously, we are very used to now jumping on a call, jumping on a video call. Did you have conference calls and things then? How were you collectively sharing these views?
Mark:
Look, well, in the office, of course, in London it was literally shouting across the room.
Well, ironically, there's actually quite an interesting point in that. In most parts of any organisation, people generally want to have more space between them. Traders are a strange breed, and I can speak as one for 25 years. We were the people that wanted to be closer together all the time. We wanted a minimum amount of space between us and the next desk. Because literally shouting across a room was very often the best means of communicating what was happening in realtime. So we didn't want to have boxed-off offices, we wanted to have open plan. But more than that, where you sat and how close you were to other desks, was something we spent hours on designing to make sure that we kept those information changed as short as possible between the people that had to know what was going on in various markets.
Of course, then, for the wider world, we were probably still in the days of pre-conference calls at that point in time. It was much more by telephone. But I went back to what I said earlier, being in this what I might call the centre of the world time zone, GMT, was really, really important if you wanted to run a serious trading operation at that particular point. Certainly, if you had exposure to Brent, that was the place to be. I think one or two of your other contributors on other webcasts have perhaps made a similar point.
David:
Yeah, I think they have. Yeah.
So the turn of the '90s around 2002, there was some big methodology changes going on with Brent. You had a front row seat to those developments and I guess might have contributed some views, as well. So there were other grades being added. We alluded to it right at the top of this episode that actually production of the Brent Field peaked quite early on in its life, in terms of where we are now, historically, peaked quite early.
So the Brent Benchmark, really, people have been predicting the challenges that it would face in terms of supplementing that supply. Some of the ideas back in 2002 at the turn of the century then, were to add other grades such as Forties, Oseberg. There were other developments as well to the methodology, such as quality premiums.
Can you talk us through your perspective on how the benchmark evolved and maybe what contributions you made, if any?
Mark:
Sure. You couldn't be in the job I was in without contributing a fair bit to this. Of course, we had to make sure that we did that in the appropriate way, that was really, really important.
The sustainability of the benchmark was something that was very much uppermost in our minds. The PRAs, I think it's important to point out, first of all, whether I agreed or disagreed sometimes with them at various points of my career and even around this time, there's no getting away from the fact that they were under massive pressure from their customers to bring a perceived good order to the prices they were reporting, to ensure that they continue to be representative of the fundamentals and a useful and fair basis for people to price their other crude purchases and sales.
So around that time, David, the volatility around dated was sky high on a percentage basis, albeit at very low outright prices. So when the underlying price of Brent futures was say, $20 a barrel, but the market was down $3 a barrel on dated or up $3 a barrel in a particular week on dated, that was really, really noticeable and had a lot of people getting quite excited, whether they were producers or refiners or just someone else in the value chain, including traders.
So having a wider base of crudes and looking at the other terms and conditions was necessary. Particularly when that the Brent production was falling and was already well sub-400,000 barrels, about 400,000 barrels a day.
Forties and Oseberg additions meant that quadrupled overnight. Yeah, that was the proposal, that's what it was going to do. The belief was that was going to add perceived robustness and reliability to the Brent Complex. So it was a very, very compelling argument to put those grades into play.
I think it's worth probably just reflecting, one reason that making additions to the basket had less resistance than it might have previously had is that refiners have become more tolerant on what crudes they could use for different modes of operation. This is why, perhaps, some of that introduction was important. I talked about the fact I had some refinery background right at the very start. I mentioned as a bitumen technologist at that point in time, early in my career, that's where I became very sensitised to you can only make bitumens from certain crudes at that point. Of course, we over the years that's become more flexible.
But the same was true when it came to Brent. So one thing that Brent was really key for back in the late 1990s, early 2000s, was for lubricant manufacturer. So we would very often put Brent through a refinery. Then, we'd be generating lubricants as one of the products out of the refinery at the back end of that. So lubricants had a very, very narrow set of crudes for some players, including Brent.
Therefore, the idea of throwing other crudes that could be delivered into you that perhaps weren't so compatible, that would've been a real problem, say, 10 years previous, but became less of an issue by the time we got to the early 2000s.
So from my perspective, at least though, I think just generally speaking, it was really important that the crudes that were added into that bread basket were similar to Brent in quality. Brent, of course, was a blend of crudes from different fields in its own right, but it was a light crude with just under 0.4% sulphur. Forties had a similar API, similar density but were slightly more sour. Oseberg was slightly lighter and sweeter. But they were at least similar grades. So you didn't have to have massive quality premiums. You weren't going to be looking at something you couldn't process at all if you finished up, getting given one of those grades in the Brent basket, rather than what we knew as real Brent, if you will.
There was huge lobbying, David, from some parts of the industry for Ekofisk to be added around the early 2000s, another light sweet crude. But there were pushback from others. Perhaps one reason why there was pushback from others was that some of the key ingredients for new crude be added was that ensuring that no one had too much percentage equity in an added grade or the aggregate of grades in the Brent basket. Maybe there was a fear from some market participants that Ekofisk was perhaps too concentrated in certain hands. There was another reason why Ekofisk, at the time at least, maybe there was some slight pushbacks, that what was really key was that ensuring with any grade in the Brent Basket that larger ships, LR2s, VLCCs, et cetera, could be loaded to allow trade, for example, to the Far East or to the Asian subcontinent. Brent, Oseberg [inaudible 00:21:11] Forties very much fitted that bracket.
I think you touched upon the fact that there were other terms and conditions being played with at the time. One of the issues that was particularly contentious was the issue of volume tolerance. One PRA wanted to completely eliminate volume tolerance on Brent cargoes. But that was shot down as being not just impractical, but actually impossible.
I'm going to just ask the listeners to consider... Listeners may now have electric cars, but take them, those people and others, back to the last time they tried to fill up at a petrol pump or a diesel pump. Imagine you are trying to be one of those people that stops the petrol pump or diesel pump at a fixed number, it might be litres or value, pounds, dollars, whatever. So you're trying to stop it at say, 70 pounds. Now add, say, three decimal places to that. So not just 70.00, but 70.00000. It makes it 1,000 times as hard to stop it exactly at 70. In fact, it makes it impossible.
So we just said, look, "If you want to completely a eliminate volume tolerance, that's just math... You cannot do that." There had to be some volume tolerance left. It was reduced, albeit, however, from 5% to 1%. But that made it something we could all then physically work with.
Changing the window of trades was also key. So that was something, again, lots of conversation in the marketplace at that time. But it got moved in the end from 5 to 15 days, which is compatible with 15-day Brent to 10 to 21 days. So it became 21-day Brent. Of course, it's been expanded subsequently to allow more cargoes to be tradable at any one time as a Dated Brent cargo.
Throughout all of this, with the incorporation of grades, with the change of volume tolerance, with the change of the window of trades, we just kept on amending SUKO 1990 GT&Cs accordingly. But they were able to be flexible enough to be changed, but still remain a full crumb of the Brent Complex.
I'm going to just say here, retrospective 20 odd years on, huge congratulations to everyone, and huge testimony to everyone who was involved, from the PRAs to the traders, from the brokers, to the operators. It was a massively seismic change when all these changes happened, including the incorporation of Forties to Oseberg. It was a seismic change for the market, but no balls were dropped. It was really, really impressive about what the market can do when the market has to make a change like this.
Of course, with the proposed incorporation of WTI Midland from May 2023... First of all, the SUKO 90 GT&C conditions are being amended again after previous changes to include Eko and Troll. Once again, the market will have to cope with this incorporation and the various challenges it takes, including the changing the GT&Cs. Once again, I have every confidence the market will rise to the occasion and incorporate the new grades to make that continued sustainability of the benchmark possible.
David:
Mark, it strikes me that what you've described as trading is perhaps one of the most competitive commercial... The areas of business and economic life. But all of these changes are only possible by people making compromises here, fierce competitors making compromises and coming together for the greater good of market structure and continuity.
Mark:
Yeah, I think it's a great observation. Indeed, it always will be competitive as indeed anything should be in a free market. That's what you expect. If it's not competitive, then the opposite is really not very palatable.
But everyone has an interest in making sure that the market can still work. If you don't compromise, if everyone just says, "No, no, we refuse to trade on those GT&Cs or we won't trade unless this grade is incorporated" or whatever, then you're dead or the sustainability of that market is dead.
So of course, everyone had their strong positions on certain issues, but there comes a point where the conversation has to stop and you have to move on. That's what happened in the early 2000s. I'm sure that's what happened with the incorporation of Ekofisk. Then subsequently, I know it's what happened with Ekofisk and Troll later on. It's happening now around the incorporation of WTI Midland.
I know, for example, in this most recent iteration of the benchmark, of course, there would've been many people that would ultimately have had to give up on their wish to have [inaudible 00:26:23] be incorporated, which of course is a much heavier crude than the existing basket of crudes. They would ultimately have had to have relent on that in order for the market to continue. Yeah, compromises were important then and they continue to be important now.
David:
Mark, perhaps we can turn now to get some final thoughts from you on Brent and its longevity. How do you assess Brent, this benchmark? It's the champion of them all. You were there in the hot seat at a major equity producer in the Brent Field for many years. How do you assess the role of the benchmark?
Mark:
Yeah, so my reflection is, Brent's longevity has been maintained over four decades. It is, indeed, a remarkable survival exercise. I think a number of reflections.
It helps that Brent is where it is and can be connected to all parts of the world. You can use the crudes that are part of its basket or have been able to use them, pretty much anywhere.
It helps that you can load big ships that make getting it to those places affordable. We talked earlier about the Far Eastern, the Asian subcontinent. There's just one example of that.
I think it helped that London was on a central time zone for much of the world's population. So even people in the States and even people in the East, at some point during the day, they could connect with the folks who were involved in the operations around the Brent market and the various grades, that makeup the Brent market.
I think I mentioned before, it helped that Brent was a grade that didn't need the most complex refineries in the world to process it. The grades that have been added to it, subsequently, have not changed that. So it's been very accessible and relevant to many refiners.
Then a bit of the chicken and egg thing, perhaps, but the very confidence that Brent has built in itself as a benchmark over the years has meant that people have been prepared to trade derivative contracts many years into the future, off of Brent. Therefore, a lot of people have a great deal of interest in seeing its survival because they've written a contract based off it. So that becomes a bit of a self-fulfilling prophecy and helps maintain the momentum of it. I think all those factors have been helpful.
A number of people, of course, make their living off the benchmark, including the futures exchange owners and the brokers and the PRAs. Again, that helps with sustainability. Just as it is important to have a choice of exchange and choice of broker, I'll just throw in there, I think it's really important to have a choice of PRA, as well. If you are buying any service you want choices of suppliers, particularly if the service you are buying is absolutely unavoidable.
I think the final comment I'll make is it really helps if governments and other institutions have generally stayed away from the development of the benchmark and let the market participants sort out the issues underlying its evolution. I think we talked about that a little bit when we touched upon the Forties and Ose and their incorporation. The market was really, really successful in making that change. I'm sure it'll be successful next year with the incorporation of WTI Midland.
Long may that continue and long may Brent be a successful benchmark, whatever is incorporated within it.
David:
Mark, thank you so much. It's been a real privilege to have someone on the podcast who was at the coal face of Brent for so many years. Many, many thanks for joining us.
Mark:
Thank you, David, and I hope the listeners enjoyed this. I've certainly enjoyed speaking to you about it.
David:
That's great. Well, to our listeners, if you'd like to engage with anything Mark has said, you can join in the conversation on Twitter and LinkedIn by using the hashtag #GXPriceOfEverything. You've been listening to The Price of Everything, a new podcast from General Index. Goodbye.