Whenever an infrastructure failure makes the news it is usually a dramatic event like the horrific bridge collapse in Minneapolis a decade ago or the nightmare that was the BP oil spill in the Gulf of Mexico. Sometimes, though, profound threats to the economy and to people can be brought about by something as small as a single miniscule crack.
That is exactly what happened to oil producers in the North Sea this month. A hairline crack in the Forties Pipeline System has caused a loss of 40 percent of crude that makes up the Dated Brent, which is the most important physical oil benchmark in the world and helps settled over half of the world’s physical oil prices.
According to the index publisher, S&P Global Platts, “the term ‘Dated Brent’ refers to physical cargoes of crude oil in the North Sea that have been assigned specific delivery dates.” It is important because the index is the main indicator of price of crude oil in the world and affects crude sales prices around the planet.
In the short-term the crack has pushed Brent futures to over $65 a barrel for the first time in two and a half years. But the long-term problem for the oil industry in the UK is that the debacle has further enticed buyers to look at alternative markets in the Asia-Pacific and Middle East regions.
“It’s the most important benchmark, but on the other hand it’s only 1.5 percent of global production, so it’s very strange,” Hans van Cleef, ABN Amro senior energy economist told Bloomberg. “It remains remarkable to see how big an impact can be from such a small production area.”
Oil is pumped from the Forties Oil Field, which is the largest oil field in the North Sea, and piped to refineries in the UK. The field was discovered in 1970 and began to produce oil in 1975.
“Forties” is one of five crude grades that make up the Dated Brent price assessment. The others are the Brent, Oseberg, Ekofisk, and Troll. In a stroke of good fortune, Platts had just added the Troll before the crack in the Forties was discovered and the new component crude has made up for some of the lack of volume from the Forties.
Platts contends that for the index to maintain reliability, there must be a minimum of 500,000 barrels of crude per day accounted for in the index. Though the index has not fallen behind this minimum production threshold, the trouble isn’t over yet. The company that operates the pipeline, Ineos, said repairs should only take around two to three weeks and be complete in early 2018. However, if they are not the crude flow could eventually dip below that 500,000-barrel minimum.
This glitch in supply occurs at a time when OPEC, Russia and nine other oil-producing nations have agreed to extend their agreement to pull back on their output to help trim down worldwide supply.
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