RusEnergy

April 14, 2006 The Kommersant - by Dmitry Butrin -
The price of Urals oil now independent of Brent
The pricing system for Russian oil exports has been a topic of discussion among professionals for a long time. That discussion will grow broader as the New York Mercantile Exchange begins trading in Russian oil futures in the autumn of this year and the Russian Ministry of Economic Development and Trade and Ministry of Industry and Energy make preparations for the launch of a Russian oil exchange in 2007. Information agencies and other reporters on the oil market are gradually changing their methods for determining the price for Urals oil, basing it less on the price of Brent.
The price of Urals will most likely be independent of Brent within a year, and then it will be possible to determine Russia's real influence on world oil prices. The present pricing system is based exchange trading in "maker" types of oil – American WTI and North Sea Brent – and the differential between them, with is calculated by reporting agencies based on real cash deals close to the spot market. The differentials on Urals in many cases are greater than 10 percent of the price of Brent. This has long been a source of criticism. The differential is based on significant indicators, such as the lower quality of the (high-sulfur, or sour) Urals as compared to the (low-sulfur, or sweet) Brent, logistic risks associated with the terminals at Russian ports and the pipeline system. On the other hand, the pricing system is not based purely on the market. It does not depend on the balance of supply and demand for Russian oil, but on the balance of trading operations by the largest buyers on the cash market, some of which, such as Stasco and SK Trading, are affiliated with major companies such as Shell and South Korea's SK Energy, which are interested in playing on differentials and making a profit the price differences in different regions. According to Deputy Economics Minister Kirill Androsov, plans for the establishment of an oil exchange in Russia look as follows. Between May and July of this year, the government will form an interagency working group and the exchange and its clearing center will be registered as legal entities by September. By September of next year, a trading platform will be formed and, in the third quarter of next year a trading system with immediate delivery (spot trading) will be launched. Trading in futures contracts will be organized later, no earlier than the fourth quarter of next year. At that time, it will be possible to say that an independent pricing system has been established for Urals oil. Androsov stipulated that all plans are "approximate." The working group will set exact dates. The reasons for the slow pace are clear. Economics Ministry experts say that it is necessary to form a standard for Russian export blend crude oil, which entails reducing its sulfur content by optimizing the load density at the Ufa oil refineries and changing the routing of export flows. In addition, Russian Federal Service for Financial Markets head Oleg Vyugin says that changes will be necessary in legislation, mainly the description of futures trading, which is now poorly defended from the legal point of view. Finally, according to Deloitte partner Maxim Lyubomudrov, there are a number of problems with the taxation system and it has no experience analyzing the use of hedging instruments such as futures. Participants on the market are skeptical even of a spot market for oil. The conversion from a cash market to an exchange system has never been seen in the world, and influential, conservative forces on the oil market, such as Glencore, are unlikely to agree to the change without administrative pressure. The formation of a spot market will not lead to independent pricing. Futures and forwards instruments are necessary because they allow not only oil companies, but also banks, investment companies, insurance companies and so on to play the market. Expertica (formerly Crown resources) and the NYMEX commodities market have come out with a Russian Energies Futures project to trade in Russian export blend crude oil futures in London beginning in the end of July. Vyugin states that the Russian government supports that effort fully, and does not see any reason to object to parallel quotations on Russian oil in Russia and Great Britain. The Russian government has strong influence in the project: without the cooperation of Rosneft and Gazprom (which controls Sibneft), the project will go nowhere. The founders of Russian Energies Futures say that, if 5 percent of exports are traded on the system, it will be a success.