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In the first of a two-parter, we explore how Mark first got interested in oil, how he made the leap into trading from refining, and discuss Shell’s role in Brent market standardisation.
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 oil field off the coast of Scotland become so pivotal in global oil pricing? My colleague David Elward explores the history.
David:
In 1972, Shell announced the discovery of the Brent Field in the North Sea. The exploration platform Bravo was installed in 1975, a 115 miles northeast of Shetland, and production began the following year, with the first tanker loading crude oil at the Brent Spa in November '76.
Around the same time, a school boy somewhere in England entered his teenage years soaking up the front page news of spiralling oil prices. By the time Brent Field production peaked at 504,000 barrels of oil per day in 1982, that school boy was now an undergraduate, reaching the end of his studies and on the brink of beginning a 38-year career at Shell, where he would rise to head the world's largest crude oil trade-in business.
Well, hello everyone. Welcome back to the Price of Everything. That school boy was one Mark Quartermain, and I'm pleased to say he joins us now on the podcast. Mark, welcome to the Price of Everything.
Mark:
Thank you very much indeed, David, a very nostalgic introduction. Thank you.
David:
Good. Well, don't worry this isn't an episode of This Is Your Life. We don't have any surprise special guests waiting for you in the wings, but I'll just tell listeners. So Marc, as I've alluded to, he held various roles during his four decades at Shell, including as head of oil products, trading and supply, and later the same role for crude. And we're really pleased to have Mark on the podcast today, here this episode three in this series on Brent because his time at Shell began before the Brent benchmarks had even been launched. And as I said at the top of this episode, Shell was one of the equity producers in the Brent Oil field itself in the North Sea. So I'm really looking forward to digging into your experiences and giving our listeners that front seat view. So Mark, before we dive really into the thick of it, let's go back to where it all began for you. How did you come to be an oil trader in the first place?
Mark:
Thank you very much indeed, David. Much appreciated and I hope we'll share some interesting insights here with the listeners. Yeah, I think you mentioned at the front there, my teenage years in a school somewhere in England, I really always wanted to work in oil refining specifically, since making my career decision at the age of 13 years. Which wasn't weird for me at the time, but sounds pretty weird now, and certainly sounded very weird to many people I've spoken to. But I had an excellent careers master who basically said, "In order to get on in life, young man, you really should focus your energies pretty early on with your choice of your various subjects that you're going to study. And here's three ideas, banking, computing, and oil." That was literally the three he put in front of me.
I could have chosen any of those three. I was reasonably mathematical, certainly preferred maths to doing things like English and other subjects. And so, they were natural fits for me and he probably knew that. But as I think you mentioned in the introduction, oil was very much front page news in 1973, '74, with the explosion of prices, and it was very much on the basis of what I was reading on the front pages. I just thought, "That sounds interesting, that sounds cutting edge." And I chose oil and picked and worked for my GCSE as they have them in the UK and A level qualifications and degree accordingly.
And then started in Shell, as you mentioned, in 1983 as a graduate chemical engineer. And then on the way to becoming a trader, did those six years as a chemical engineer, before moving into supply and strategy on the marketing side. And then did a spell in finance alongside a module on the MBA, a five year MBA that I did with the Open University, which I can assure you was no mean feat with three very young children. It was not an easy combination of things to do.
And it was Peter Ward, I think ... and look, many people on this call may have heard about him, but certainly one of the doyens of crude oil since it started treading in the early 1980s, and the reputed inventor of the forward contract, which I suspect David will talk about later. He was the person that actually saw me in my other moves in my various roles in Shell and thought I had the credentials and the value chain background to be a trader. So, he plucked me from the rest of the Shell world and took me into trading in 1993.
David:
Right. So, I guess you landed right in the thick of it. Just take us back in terms of your experience as a chemical engineer. What did that look like when you were working within the supply and strategy?
Mark:
Yeah, so I did two separate things. I worked in the refinery for six years, which is the thing I've been working for since I've been the age of 13. So, I worked in things like distillation, kerosene treating, and actually the thing was my breakthrough role was actually in the worst part of the refinery, arguably in bitumen. And actually-
David:
What refinery was this, Mark?
Mark:
This was Stanlow Refinery, up in the northwest of England, which is no longer owned by Shell, but it's still very much present up there as one of the key UK refineries. So, that was where I had my six years experience. And again, that finished in bitumen refining, where I actually got my real first sense of the importance of crude selection to the products you're making. I suspect we'll touch upon that later on when it comes to Brent, specifically. And it was from bitumen refining that I was then plucked into bitumen marketing down in the southwest of England, sorry down in the southeast of England, I beg your pardon. And in the southeast of England and the head office for bitumen marketing, that's where I did my supply, my strategy and indeed the small, the digression into finance alongside a module I was doing on MBA. And so, it was with that whole background of experience that they then said, "Well, you've done some manufacturing, you've done some marketing, how do you fancy doing some trading?" That was the background to it.
David:
And that's where you'd encountered Peter Ward. And as you said, many of our listeners who perhaps who've read different books, or maybe they're veterans of the industry themselves, and perhaps encountered him firsthand. I mean, he was a prolific figure at Shell and in the wider industry. How did you come to find yourself on his radar?
Mark:
I honestly have no idea. I think he'd heard of me, I think he may have seen me a couple of times in the office. I think it was very much not me, but the experience that I had that was important. Trading at that point in time ... There's no such thing as a degree in trading, of course. Some people had started in trading, other people were taken from other parts of the Shell environment with various skill sets, including manufacturing and in some cases marketing, because they had that broader understanding of the business. It wasn't just about buying a cargo of crude oil and then, wonder what happens to that, sort of thing?
As a person who'd worked on a refinery, I knew what happened to that. I knew why crude quality was important. I knew why product quality was important. And so, I think it was more the skillsets and the experience, I would argue, than me specifically that Peter was probably attracted to. And that's not about false modesty. I know that a lot of other people were plucked with similar experience. He wanted people who understood where the stuff came from and where it was going to, if I can put it in those crude terms.
David:
Well, so tell us then, you moved into the trading team. What was your early experience there?
Mark:
Well, I think that the relevance of the introduction becomes particularly ... comes out here, because if I thought that all that value chain experience I've just talked about, and indeed I was fourth year of five year of MBA studies, I think I mentioned that. So, I was right towards the end of that. If I thought any of that would prepare me for the world of trading, I couldn't have been more wrong. I really couldn't have been.
I don't think I came in expecting it to give me a ... "Oh, this is going to be easy." I never thought that, but was ... none of it prepared me and perhaps touch upon more on that very shortly in terms of the evolution of the market.
But I started in products trading. I traded fuel oil, first of all, David in 1993. Ironically, fuel oil, perhaps some of the listeners don't know this had something in common with crude oil, apart from being a hydrocarbon, of course. It had a forward contract. The Littlebrook high sulphur, fuel oil, CIF, that's cost insurance and freight, cargoes contract. That contract made some people fortunes, mainly brokers who were charging 25 cents a tonne from memory, on a 25,000 tonne standardised contract, which I think my maths still worked reasonably well, that's $6,250 a clip in 1993 money.
So, I know one broker who claimed he built his entire art collection on the proceeds of matching buyers and sellers of Littlebrook forwards for a few years. I don't know whether the listeners need any more clarification of the forward contract, David?
David:
Well, I think it's ... what we've found going through these episodes, is that we are not afraid to tackle complex subjects. We know that our listeners will come from different backgrounds. So, I think it's always useful for us to dig into that little further. How would you describe, unpack what a forward contract is, Mark?
Mark:
Yeah, very simply, I would say, as is the case as we'll come to in Brent, it is something which is basically a standardised contract for future or forward delivery. So, a physical contract in this instance, like with Brent, where you're basically saying the buyer and the seller are committing to supply and will take delivery of a specified quantity of fuel oil at a particular location. In this case, Littlebrook, which is based in the southeast of England. And all of the terms and conditions pretty much, apart from price, who the buyer and the seller are, and one or two minor issues around credit perhaps, all of the clauses are already stipulated. So, that makes it very, very easy to trade them. And it makes it very, very easy for brokers to match up lots of people who want to buy and sell them.
And interestingly David, the contract was invented to fulfil what started as a social as well as a commercial need, this particular contract. The contract emerged from the challenges in the UK in the mid 1980s with the miners' strike. So there was a big industrial dispute in the UK, the miners' strike, and that had massive consequences for the supply of coal to the coal fire power stations of the UK.
Littlebrook power station in southern England was one of a number of fuel oil burning power stations. So, irrespective of your political leanings, irrespective of whether you were for the miners' strike and still were, or whether you were against it and still are, burning fuel oil at little Brick became a really important part of keeping the lights on in this country, when the domestic coal supplies dried up because of the strike and by the ... So, that fuel or forward contract almost because of the amount of fuel oil that was take being taken into Littlebrook to keep the lights on, there was a demand, if you will, for that product to be delivered to that location.
And then very quickly, and this is where the brilliant ingenuity of the market comes to bear, people said, "Well, hang on, this is happening so often. We can standardise this, we can create a forward contract. Clearly this is going to be needed for months in advance." So people want to buy and sell forward. That's what the word means. And so therefore, the Littlebrook forward contract came out of that. And by the early 1990s, and even with the miners' strike long behind us, it was still part of the market architecture.
These contracts, like the crude forward market, which as you mentioned was born in the early 1980s, eventually created a fixed reference price off which other things could be priced. So, with all these things, sometimes they can eventually lead lives far removed from their original motive, if that makes sense. So, apart from keeping the lights on, that was the motivation in the mid 1980s, now moving on to being something which is a price reference eight to 10 years later.
So, it became very much a speculation and hedging tool for people, a price reference tool. And it was particularly useful, this particular fuel oil contract because unlike most other parts of the barrel, there was no serious futures contract for fuel oil. It didn't have a futures market like the gas oil did, for example. Or it didn't have a futures market like gasoline in the US. So, it was a contract which went through various motivations, if you will, for its existence. But was very much part of my immediate trading, what I was introduced to and [inaudible 00:15:27]-
David:
It's quite interesting. I was just going to say it's fascinating because it makes one think that obviously we're all living through times of crisis in terms of energy crisis and economic crisis, not too dissimilar perhaps to the 1970s and '80s. And there are companies having to do similar things, in terms of create new innovative contracts. So, maybe in a couple of decades' time, someone else will be doing a podcast and referencing back to what they devise now and how that's been used.
Mark:
But David, it probably won't be called a podcast, it'll have a new name in 20 years.
David:
Yes. I guess you're quite right.
Mark:
Going back to my early experience, the enormity of the change from a life where I pretty much knew on Monday what I was going to be doing on Friday, David, to a world where I didn't know what I'd be doing in five minutes time was a massive shock to me. I'm happy to expand on that if that's helpful.
David:
Yeah. How did you adapt culturally to that shift in your working routine?
Mark:
Well, I certainly didn't for the first few months. I'm not too shy to say that. I just wasn't prepared for the real time aggressiveness of the market. I can recall an early fuel oil trade where I thought I'd done a really, really good job, studying the supply demand picture of the market. I'd waited and waited to sell. I knew there were only two cargoes left for sale and I believe the buyer needed both of them. And I think to this day, I still think they needed both of them, but I just waited too long.
People talk about in trading there's a two-sided coin, greed and fear. Well, I saw both sides of that. I was perhaps unknowingly greedy and I certainly turned knowingly fearful. The other seller sold their cargo at a fixed price at the top of the market. And I waited and waited and waited for the call, for my purchase as well to go through. But in the end, I was forced to sell my cargo at the Price Reporting Agency, the PRA's quote, in two weeks time and we can only ... I guess the listeners [inaudible 00:17:32] worked out, guess what happened to that quote? It and I took a bath and it wasn't a very warm one. It was a very, very cold welcome David to the world of benchmarks and pricing.
So, I'd sold my cargo, it was physically placed, but it was pricing of a quote in two weeks' time. And without getting into all the whys and wherewithal of how the quote then began to turn south, let's just say the supply demand picture changed, and perhaps the buyer of my cargo knew that that was going to be the case. And I took a very cold bath and I can remember my colleagues looking at me around going, "There's no point being clever with the supply and demand if you get this bit wrong," and I got it a bit wrong.
David:
I guess you discovered that this, what you'd moved into, wasn't for the faint hearted.
Mark:
No, and a lot of people didn't survive there early introduction to trading. I could have easily have been one of those people. It was a really, really tough baptism, if you will, of welcome to the world of trading. So, I really, really struggle for the first nine months until I learned partly the resilience and the nous necessary to survive and what has been described by others as a dog eat dog market, in a loosey goosey pricing environment. I think that phrase has been used as well, in both products and in crude. I think, yeah, it wasn't any different in both of them.
I always smile a little bit because when we talk about loosey goosey pricing environments, it's a very appropriate phrase given that Brent, no less, was named after a variety of guess what? A goose.
But anyway, I traded other products and I actually traded also freight for a period. And spent six months then working on completing the first ever natural gas spot trade for Shell. I will just make it very, very clear to the listeners, that was at a much cheaper fixed price than now. And I say fixed so much cheaper because of course the conditions are very, very different today, but also at a fixed price because, guess what? There were no benchmarks for natural gas. So, that was the only way that you had to sell your product. You couldn't sell off PRA medium, or sorry, PPRA midpoint, or PRA high quotation because there were no quotations. The market wasn't liquid enough to support a benchmark, so you had to sell on a fixed price basis. And then I arrived in crude in 1997, which I guess will be the next thing to talk about.
David:
So you'd been, by this point ... I mean you'd had a decent career, right? You'd been at Shell for 14, going on 15 years. This was home for you, you felt comfortable there, this is where you wanted to be?
Mark:
In trading, yeah. I think by that point, by 1997 when I moved in into crude, no, I was very settled by that point. As I say, I think it took about nine months to get used to trading. And after that, of course you had up updates and down days, particularly in very volatile markets. But I'd learnt the resilience that's necessary then by that point, to be able to navigate those ups and downs. So, I was ready for crude when I got there in 1997.
Interestingly, I made the move as Shell was going through huge changes, which made it more ... it certainly helped prepare the ground for me. I don't know if most of your listeners know this, because it is still remarkable to talk about it nowadays, even as a person who worked through it. But up until the second half of the 1990s, shell had traded as Shell International, but also as Shell US, as Shell Francais, as Deutsche Shell, as Shell Norge, as Shell Svenska, as Shell Danska.
It was in many countries, certainly the ones in Europe, we basically all traded as separate entities. We were loosely affiliated, but very loosely. And the independent traders and some of the other integrated oil company traders loved that. And it wasn't unknown for those traders to buy and sell product cargoes and make money in between the Shell entities and that was ... Even as a Shell UK trader as I was, and had been since 1993. I can recall the rivalry between the Shell International traders and the Shell UK traders in particular in crude, but also in products.
And Axl Bush, who was a very respected journalist at the time, wrote a darkly comic piece about the intra-Shell rivalry and the cool reception we would receive in each other's offices. And that was true. But the most important thing, and the thing that helped me in 1997 was peace broke out. We all came together as one Shell was going through other big changes, and it became less about which country you worked in and more about the bigger whole. And Shell Trading's new organisation was able to ... became what's called a single market interface, an SMI for all Shell Group entities. And that was the structure that carried me through my crude career and has remained successfully in place until I called Time on my entire Shell career back in 2021.
David:
So, you arrived in crude trading at Shell in the years leading up to what was ... I mean, they were really the first of a series of really, major changes for Brent. And I guess this is a good point that we pivot the discussion to our theme of this podcast series, Brent and the benchmarks. So, there were major changes coming up for the Brent benchmark. What do you recall from that period?
Mark:
Yeah, well, I touched upon the SMI, the single market interface organisation, and that was a massive help to help us to survive what was a really turbulent period between 1997 and 2002, when the Brent benchmark was going through many challenges and its ultimate transformation. There's an excellent book, which I had the pleasure of rereading recently, The Squeeze by Tom Bower, and that shines a strong light on the evolution of oil trading and a strong light on that period in particular. So, I recommend to your listeners taking a look at that.
But it was really epitomised by being a very aggressive period. And Brent was of course the main focus as a benchmark, sitting alongside other benchmarks like WTI, which were also having periods of significant volatility. For me and my team within that environment, we of course had to sell equity crude from around the region, and we had to supply our refineries with North Sea crudes in the northwest European region and far beyond.
But the Brent Market, which had now been up and running for of course about 15 years, it was really, really well established and a cornerstone of what we and a lot of other people looked at every day. It's worth saying those people were mainly in London, to a lesser extent in Geneva and one or two other European capitals, because they were close to the GMT time zone. That was really, really important if you wanted to be on top of those realtime developments. I think I said it was really well established. North Sea exploration and production now was fully privatised post Margaret Thatcher's time in office as the UK Prime Minister. There was a flourishing trading business include involving the so-called Wall Street refiners, IP, Brent Futures was of course, active and really successfully established, and the PRAs had long been publishing its dated Brent benchmark on a daily basis.
I should add. This was alongside pages and pages of journalism discussing the market and other scuttlebutt and rumour, which we only read if we were bored or we had just come back from holiday. I hate to say that. So, any person that was writing in the mid 1990s or late 1990s, my sincere apologies if you thought you were writing something that I was reading every single day. I wasn't. But one thing that was really critical was checking on the prices that were being published. And I suspect the PRAs at that time probably didn't appreciate, David, the increasing number of long-term derivative contracts being based off the price assessments for dated Brent, were what could be called a strategic control point, that would make the publication almost a distress purchase. Something you had to buy, irrespective of the subscription cost, if that makes sense.
David:
Well, we won't go into subscription costs on this podcast, but it's something that we are very happy to discuss with our listeners at General Index. Perhaps this is a good point at which to turn and just dive a little bit more into the Brent forward market. You helped us really digest earlier about that example on fuel oil. Talk us through, we've had a flavour of this on one of our earlier podcasts, but great for us to get your perspective at Shell at equity producer of the pricing complex around Brent.
Mark:
Yeah, so of course, the price, the Brent pricing complex in particular had the 15 day Brent, the 15 day forward Brent Market, and a flourishing CFD, contracts for different swaps market, which together allowed people to hedge, to speculate, to guarantee the supply of Brent, or guarantee the disposal of equity into the future. That combination of hedging and speculating interests were really necessary to create the liquidity for a functioning Brent complex price reference market. Just like any other commodity or instrument class, there's no different to agriculture, metals, bonds, equities. You need people to have different motivations and in order to have a price reference market, with the necessary robustness and liquidity, and you need all those various parts of the complex to line up, which in the case of Brent, they certainly did. So, that was all good.
And for the 15 day Brent Market, one part of the complex, this part of the complex, was particularly underpinned by the SUKO 1990 GT and Cs, general terms and additions. SUKO was, I think I mentioned earlier, the UK arm of Shell, and the fact it was this part of Shell underlines that the 15 day Brent market's life started as purely a means of tax efficiently placing Brent's equity. And those GT and Cs played a key role in sustaining that market throughout, in that instance, now the first 15 years of its life, and of course that's gone on well beyond that, to the current day.
When I say sustain the market, it means you minimise the disputes around a myriad of potential commercial and logistical issues, which can come up of any oil sale and purchase. One such area of potential dispute was around so-called five o' clocking. That was a crazy, daisy chain, pass the parcel process, which culminated in the situation at five o'clock UK time when a cargo with dates 15 days ahead can no longer be sold as a 15 day Brent forward cargo and became a dated cargo. And quite often, David, the latter was worth, substantially less. So you didn't want to necessarily get stuck at five o'clock with that parcel in your hands.
But the GT and Cs were really important in trying to minimise disputes around that. And one key piece was everyone had to agree what five ... This wasn't something you did by your Timex watch. This was something where you had to be absolutely clear what five o'clock was. And so, in Shell, for example, we had an atomic clock to ensure we absolutely knew what the correct time was and therefore, whether if we passed a parcel before five o'clock, or we were left with the parcel at five o'clock, we knew exactly where we stood. But even then, armed with the correct time, there were still disputes, including the availability of the counterparty to pick up the phone at just before five o'clock to receive their dates. Sometimes it was difficult to get through. Particularly in volatile times, the operators that worked on the desk at that point in time managing this process, really did earn their money.
David:
That's a good place for us to pause and bring the first part of episode one to a close. When we come back, Mark will tell us how he once traded $100 million worth of crude on a cold winter's day while on a beach with his family in England. As we continue to explore the history of Brent, the world's most important oil price benchmark. Thank you for listening to the Price of Everything a new podcast from General Index. To continue listening, click on the link of the show notes for part two right now.