Oil Price MethodologiesCrude Price Formation

Nairobi

Kenya

May 24, 2007

NOT AN OFFICIAL UNCTAD RECORD

Today’s Agenda

• Fundamental oil market behavior• Futures market behavior• Benchmark price formation• Interrelation between financial and physical

markets• Recent price performance and the impact of

speculative flows• Comparison of Nigerian crudes with other

benchmarks• Recent proposals regarding dated Brent

price formation

Market drivers 2001-2007

• Rampant oil demand growth, particularly in Asia

• Background of strong global economic growth

• Limited spare production capacity outside Middle East

• A constrained refining environment • Speculative investments in energy markets

But…There is nothing like high prices

to cure high prices

Crude oil futures trading volume

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

Crude oil open interest

750000

1000000

1250000

1500000

1750000

2000000

2250000

2500000

2750000

3000000

Index Returns

S&P GSCI ReturnsMay 24, 2007

Daily -1.65% Month to Date -0.84% Year to Date 4.04%

Criteria for benchmarks

• Ample production volume• Open trade free of

bottlenecks• Fungible quality• Wide equity and customer

base• Market liquidity• Price Transparency

Market forces determine

price

Price cannot be dictated by

any single party

But market price is definitional

• Price is a function of key determinants including:– Size of parcel traded– Time of delivery of parcel traded– Quality of parcel delivery– Method of delivery of parcel– Payment and finance details for parcel

delivered– Time of price determination– Volume tolerances surrounding parcel

delivered– Optionalities attached to parcel delivered

Benchmark specifications

• Publishers have extensive documentation explaining definition of price

• Example with Dated Brent:– Price established at 1630 London time– Parcel size is 600,000 bbls– Method of delivery is FOB for cargo

delivery– Delivery to occur in a three day period

between 10-21 days from day of publication

– Payment is 30 days after bill of lading

Responsibilities– Publishers must be accurate, precise and

have robust methodology systems– Publishers’ definitions must line up with

market practices and best standards including legal and corporate practices

– Exchanges have similar responsibilities and need to ensure their processes and settlements meet the high standards expected of a benchmark

– Producers must be responsible and transparent

– Market makers must meet transparency disclosure requirements

Expectations

Producers, consumers, futures markets, traders, regulators and all those pricing in or out expect full

convergence between market values and published values

All expect full transparency and responsible behaviour

Benchmarks are expected to reflect market value

Most critical benchmark requirement

Published/settlement price should converge with the market price

=

Any market participant should be able to buy or sell at published price

Use Of Benchmarks In Pricing

Futures

OTCDerivatives

Term Contracts

Spot

• • Platts benchmarks are used to price term contracts• Futures settlements are often tied to spot market• Derivatives “price out” against Platts spot price assessments or futures settlements

Brent/WTI

Pricing Structure

Wet

Forward

Dated Related

Derivatives

Futures

Price highlights

Brent WTI Mars Dubai Oman Urals Med

Start of year 61.67 61.05 56.45 55.18 56.03 57.58

High 78.69 78.40 71.03 72.29 73.46 73.04

Low 55.89 56.15 49.15 48.88 55.30 46.78

End of year 58.92 61.05 53.80 55.63 57.02 55.54

Average 2006

65.15 66.41 58.07 60.70 61.69 60.41

Average 2005

54.53 56.77 43.66 49.75 50.66 50.87

Average 2004

38.27 41.41 35.31 33.70 34.39 34.50

Dated Brent – Connecting the globe

Dated Brent

Canadian CrudeLatin American

Crude

North Sea Crude

FuturesDerivatives

African CrudeMiddle East

Crude

Russian andCentral Asian

Crude

Dated Brent linkedImports into almost

all countries

Global oil pricing off Dated BFO

Price behaviorNigerian crude, Brent, WTI

30.00

35.00

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

80.00

$/b

arr

el

WTI Brent BQ

Nigerian BenchmarksKey Nigerian crude grades

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

$ D

iffe

ren

tial

to D

td B

ren

t

Escravos

Bonny Light

Brass River

Brent, Forties, Oseberg output Aug 2004-present

20

22

24

26

28

30

32

34

36

38

40

Mill

ion

sB

bls

BFO Daily Production Rates Aug 2004 - present

67 Cargoes

48 Cargoes

0

10

20

30

40

50

60

Aug-0

4

Oct-04

Dec-0

4

Feb-0

5

Apr-0

5

Jun-

05

Aug-0

5

Oct-05

Dec-0

5

Feb-0

6

Apr-0

6

Jun-

06

Aug-0

6

Oct-06

Dec-0

6

Feb-0

7

Mil

lio

n b

arr

els

Brent Forties Oseberg

48 Cargoes

63 Cargoes

0

10

20

30

40

50

60

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep-0

5

Nov-0

5

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep-0

6

Nov-0

6

Jan-

07

Mar

-07

Mill

ion

bar

rels

Brent Forties Oseberg Ekofisk

BFO Aug 2004 – present (plus Ekofisk)

71 Cargoes92 Cargoes

Production comparisons 2006

Ekofisk Brent

Forties

Oseberg

Brent Forties Oseberg Ekofisk

197.1m - 35.98%

86.6m - 15.82%

83.1m - 15.18%

180.85m - 33.02%

39, 7%

80, 14%

43, 7%

78, 13%

122, 21%

62, 11%

40, 7%

36, 6%

80, 14%

CNR Shell ExxonMobil Total BP Statoil Norsk Hydro ENI Others

Number of cargoes of BFO by company 2006

580 Cargoes

?