The Price Reporters by Owain Johnson

Author:Owain Johnson
Language: eng
Format: epub
Publisher: Routledge

Changing specifications

Although the headlines have been dominated by the development of new markets such as those for emissions or bioenergy, the greatest impact of the growth in awareness of environmental issues has been the reshaping of the traditional energy markets. Every time a specification changes or there is a major shift in market dynamics, this represents a challenge for the incumbent PRA which has to manage the transition carefully in order to protect its benchmark status and avoid missteps that could let in a competitor that is swifter to respond.

In the global oil markets, it is generally Platts that is the incumbent and so has the greatest number of specification changes to manage. In particular, the sulphur specifications of gasoil/diesel have been reformed a number of times in recent years in different jurisdictions around the world in order to promote lower sulphur content. Platts is the dominant PRA establishing gasoil/diesel prices in the three core markets of the United States, northwest Europe and Singapore and has been obliged to revise its methodologies in accordance with changing official standards, which are trending globally towards a maximum sulphur content of ten parts per million (10ppm).

A further upcoming change is the shift away from fuel oil to marine diesel or even LNG as the primary fuel for large seaborne vessels. Fuel oil powers the overwhelming majority of all intercontinental shipping but with a sulphur content of up to 3.5 per cent, fuel oil is responsible for significant emissions of sulphur dioxide, which causes acid rain and human respiratory diseases, particularly in port cities such as Hong Kong. From 2020, the International Maritime Organization (IMO) has mandated a switch away from fuel oil to fuels with a maximum sulphur content of 0.5 per cent. This will have an enormous impact on the fuel oil markets, which are dominated globally by Platts.

None of the specification changes has led to date to a change in the PRA that the industry has established as the key underlying benchmark. Platts has been able to manage sensitively all of the transitions to tighter sulphur standard, while Argus also successfully handled the 2010 transition from its Eurograde gasoline benchmark to the Eurobob standard that enforced a stricter and larger ethanol component in the European gasoline pool. Although changing specifications for environmental purposes do force the relevant markets to consider the benchmarks they use, specification changes are usually so well signposted by governments that the incumbent PRA has plenty of time to make the relevant change. The energy industry is typically also so preoccupied with the changes needed in order to meet the new standards, such as increased refinery investment, that changing the benchmark PRA is usually the last thing on anybody’s mind.

The generation fuels markets have also felt the impact of shifting environmental standards and here it is less a case of tighter specifications within the same fuel and more a case of a steady shift from one fuel to another. The push to reduce the use of thermal coal

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