Falling oil output in Indonesia has undermined Asian pricing
By Maryelle Demongeot ReutersPublished: July 22, 2008
SINGAPORE: Dwindling crude oil output in Indonesia has not only forced the country to leave OPEC but also undermined oil pricing in the Asia-Pacific region, where traders have used its Minas field output as a benchmark grade for decades.
Traders estimate that production of Minas crude, once above 400,000 barrels per day, has fallen to about half that level as the field, which began commercial production about half a century ago, ages.
Less than 50,000 barrels per day of Minas are exported, yet it is still used as a price marker for up to one million barrels a day of Indonesian, Vietnamese and Sudanese crude, a legacy from an era when Minas was the largest oil field in Southeast Asia.
"Minas is a very frail benchmark," said John Vautrain, vice president of Purvin and Gertz, an energy industry consultancy. "It is hard to hedge against it. Brent would be far easier to hedge."
The U.S. major oil company Chevron operates the Minas field, which was discovered in 1944 on Sumatra island and which produces more than half of Indonesia's crude. Chevron declined to comment on its flow rates but said work was under way to sustain production.
Indonesia, a net exporter until two years ago, decided to withdraw from the Organization of the Petroleum Exporting Countries this year, with crude output expected to fall to 927,000 barrels per day against rising fuel demand at 1.2 to 1.3 million barrels.
Falling output drives up Minas prices and exposes the market to aggressive bidding, pushing the Indonesian crude above Brent values for five of the past six months, making it a bane for refiners grappling with high costs.
Some sellers are already shying off Minas as a marker because of its wide price swings between months as they seek to placate buyers who want a more stable benchmark, like that of the North Sea Brent crude basket, even though it is halfway around the world.
"Minas is very choppy," said a trader for a refiner, who declined to be named because of company policy. "And of course refiners are unhappy with this high Minas price."
Benchmark switches take time, but people in the industry say a move to Brent would not be seen as negatively as before.
"I don't think Asia-Pacific refiners have a fear of using Brent now the way they did 5 or 10 years ago, especially Korean, Japanese and Chinese refiners," said a consultant who requested anonymity so as to not be seen revealing private client strategies.
Minas is usually valued below the bellwether light sweet Brent, which yields higher-quality products. But the lack of spot prices per barrel means the Indonesian crude can be bid daily without facing offers, driving up its price above Brent.
For example, the Minas Indonesia Crude Price, or ICP, for June rose to a record of $135.51, some $1.75 above Brent prices. In contrast, between 2004 and 2008, the Minas ICP was $1.40 below Brent, on average.
Such anomalies have prompted the Australian producer Woodside Petroleum and the Japanese trader Mitsui to sell their new Vincent crude on a Dated Brent-related basis, though the grade is heavy sweet and could be linked to Minas.
Dated is the reference for North Sea, West African, Mediterranean and Russian-Caspian crude, against which some 60 percent of the world's spot crude is traded, and the price is tied to London Brent futures as well as the swaps market.
India's Oil and Natural Gas, which has equity in Sudan's Nile Blend field, dumped Minas for Dated Brent as a benchmark starting in January to avoid the volatility of Minas.
Criticism of Minas as a benchmark is not new, but not all agree on a change. Some traders say Minas is stable compared with Brent, which sometimes moves $5 a barrel per day in price.
Asian buyers, known for their reticence, would not actively shift from Minas, but there are signs they may try new markers.
For instance, the Dubai Mercantile Exchange successfully initiated the first Middle East sour crude Oman contract last year. It has the potential to change the way more than 12 million barrels per day of crude from the Middle East to Asia are priced.
Tokyo Electric Power, or Tepco, the single-biggest buyer of Minas, said that current high prices were not enough for it to review its use of Minas, but that it was open to using other markers.
"We would consider switching to another benchmark crude, if a seller or a trader proposes Minas pricing linked to Brent or any other crude," Tepco said in an e-mailed statement.
To make the changes work, Indonesia and Vietnam also need to adopt other benchmarks. For now, the two producers appear to be satisfied with the status quo.
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