Crack in U.K. Oil Pipe Roils Crude Trading From U.S. to Asia

(Bloomberg) -- The effects of a hairline crack in one of the world’s most important oil conduits is rippling through crude markets from Europe to the U.S. and Asia.

The Forties Pipeline System is being shut after the fault was discovered near Aberdeen, Scotland. That pushed global benchmark Brent futures over $65 a barrel for the first time since June 2015, extending their premium over U.S. marker West Texas Intermediate. The outage will support some types of oil from the Asia-Pacific region and the Middle East as buyers look for alternatives to North Sea supply, according to McKinsey Energy Insights.

The U.K. link is critical because flows through it make up the single largest constituent part of so-called Dated Brent crude, which helps settle more than half the world’s physical oil prices. It feeds the Hound Point export terminal near Edinburgh in Scotland and handles supplies from over 80 fields, and the shutdown forced Apache Corp. to suspend operations at its nearby Forties asset.

The pipeline’s closure is a "force majeure situation" that will prevent operator Ineos Group Ltd. from moving oil through the system for the next few weeks, company director Tom Crotty said in an interview on Bloomberg TV on Tuesday. Ineos will know in the "next few days" whether the system will be closed for two or three weeks, he said.

Crack in U.K. Oil Pipe Roils Crude Trading From U.S. to Asia

“It’s more than just a supply disruption because it’s more significant as a price maker,” said Olivier Jakob, an analyst at Petromatrix GmbH who’s based near Zug in Switzerland. “There’s one thing which is the volume of oil which is lost, but it’s also that it’s a key price benchmark.”

Brent for February settlement rose 64 cents to $65.33 a barrel on the ICE Futures Europe exchange at 9:54 a.m. in London. Prices gained $1.29 to $64.69 on Monday. The benchmark traded at a premium of $6.90 to February WTI.

Controlled Shutdown

Ineos decided to perform a "controlled shutdown" of the pipeline so that it can perform a suitable repair, according to a company statement on Monday. The operator discovered the crack during routine maintenance, Crotty said.

"We can see visually there is absolutely no leakage from it," he said. While the crack appears to have spread fairly recently, it’s not possible to say whether it existed before Ineos completed its purchase of the pipeline system from BP Plc on Oct. 31, according to Crotty.

BP spokesman David Nicholas declined to comment.

Profits from turning crude into fuel in Europe may be squeezed by higher Brent prices, said Nevyn Nah, an analyst at industry consultant Energy Aspects Ltd. While he sees current refining margins in the region at about 50 cents to $1 a barrel above levels that would trigger cuts in operating rates, he believes plants may begin bidding up alternative supplies from West Africa and the U.S. if the outage is prolonged.

Outside Europe, the halt in Forties supply is expected to lift demand for other light-sweet crudes that typically have a lower sulfur content. Some grades from Asia-Pacific including Russia and central Asia may prove to be alternatives, according to Tushar Tarun Bansal, a consultant from McKinsey Energy Insights. Middle Eastern grades such as Abu Dhabi’s Murban crude could also be supported, he said. Sellers of such grades may withhold offers for cargoes loading in February as they assess the impact on demand, according to five traders.

Rare Halt

While routine maintenance work is commonplace for pipelines, halts related to cracks of this nature are very rare. Two people directly involved in lifting Forties crude said they couldn’t remember seeing such a stoppage for at least the last seven years, even if unplanned flow reductions do arise from time to time. Richard Longden, an Ineos spokesman, couldn’t confirm the size of the fissure.

About 400,000 barrels of Forties crude were due to load each day this month, according to a copy of the grade’s loading program obtained by Bloomberg. That’s about 40 percent of the basket of crudes used to price the Dated Brent benchmark. The others are Brent, Oseberg, Ekofisk and Troll.

“We are working with the pipeline operator to find out more about the repair work, including the impact to our production from the Forties field,” Apache said in an emailed statement.

U.K. natural gas jumped as much as 28 percent on Monday, the most since October last year.

©2017 Bloomberg L.P.