China buys two North Sea oil fields on the same day. Coincidence — or a sign of change coming to the oil market’s biggest benchmark?
In addition to Sinopec’s $1.5bn acquisition of a stake in Talisman… Cnooc’s $15bn play for Canada’s Nexen (at a 61 per cent premium to the share price!) might give the state offshore oil company a major bridgehead into the setting of the Brent crude price.
Specifically, Cnooc would have access to the Forties grade of North Sea oil — which joins with Brent, Oseberg and Ekofisk to make up the Dated Brent spot price against which futures settle.
Cnooc’s interest in Nexen is already attracting comparisons to its doomed bid for Unocal, which regulators ultimately rejected because of concerns over the US oil assets it would have acquired. Nexen has enormous US fields too.
But it might well be those North Sea interests that Cnooc wants more…
Robert Campbell of Reuters first spotted the Brent connection on Monday:
Nexen operates the 210,000 barrels per day capacity Buzzard oil field, the largest contributor to the Forties oil blend.
Once the takeover is complete, CNOOC will become the operator, gaining a critical role at the heart of the world oil pricing system.
The ownership stake in Buzzard will give CNOOC equity cargoes of Forties, allowing it to actively trade in the so-called 25-day BFOE forward market that sets the Dated Brent price.
More valuable than equity cargoes, given the decline in North Sea supplies and the growing susceptibility of the Brent market to temporary distortions due to falling liquidity, will be the critical market intelligence on the supply situation in the North Sea that CNOOC will obtain.
As Campbell points out, Cnooc wouldn’t be here to try and drive prices down to assist Chinese imports, by storing up and then dumping Forties cargo. Brent’s growing reliance on the Forties grade, and through that on declining North Sea production, would if anything make it more worthwhile to engineer price spikes through trading oil in the region.
For Campbell, it’s more basic than that: Cnooc will simply have a seat at the table when, or if, Brent’s future status as a benchmark comes under official discussion.
We’d be tempted to agree.
And that apparent Chinese thirst for more information would be pretty interesting, both in light of debates about price reporting agencies, and a parallel development in the metals market, where observers have wondered about potential government involvement: the proposed HKEx acquisition of the LME.
Update (1910 UK time) — Some scepticism from Nomura’s analysts, who also argue the deal might be too big to get through regulators:
We believe the Nexen deal, if approved, could be rather value destructive, given the high execution risk and hefty premium. Nexen’s asset portfolio has a high proportion of unconventional assets — eg, Canadian oil sands, ultra deepwater in the Gulf of Mexico and ultra deepwater with extreme weather in the North Sea. Nexen’s share value has been eroded sharply last 3-4 years, a reflection of poor execution results and slow production growth. In our view, CNOOC does not have the operational expertise to turn this around.