Oil titans' clash threatens Brent benchmark

The oil giants BP and Shell are locked in a bitter showdown over Brent Crude that could see the historic benchmark split in two.

Although both companies share the goal of protecting Brent – the market they dominate and effectively control between them – from manipulation, the two are divided on how it should be done.

At the centre of the battle is the forward market for Brent, whether the contracts should be extended to include oil from other fields, and whether buyers should have the right to specify what they are getting. If the dispute is not resolved, the market will end up with two entirely different types of Brent contract, and the benchmark will be split for the first time in its history.

As one City oils analyst explained: "This is a real clash of the titans. BP and Shell are used to having their own way when it comes to Brent, and neither is going to concede any sliver of an advantage to the other."

The outcome of their battle is certain to be felt throughout the global oil market, which is worth around £1.5bn per day. Two-thirds of all trade in oil futures uses Brent as its benchmark, and the great majority of oil products have their prices tied to it. Brent is used as the default price setting for oil pumped from Russia and Africa as well as many parts of the Middle East.

A root cause of the BP–Shell dispute is the rapidly diminishing resources of the Brent field itself. Over the past 25 years it has produced more than a billion barrels, but it is now trickling out of the pipes at around only a third of its peak rates. BP believes that there has to be more oil to regenerate confidence in the brand.

BP's proposal is that buyers should receive two other types of North Sea oil instead of Brent at the point when their contracts are settled and the product is delivered.

The proposal would allow the Brent definition to include deliveries from two other North Sea oilfields, Forties, a field operated by BP, and Oseberg.

Under the BP scheme, the seller of the cargo will have the option of specifying the type of oil 20 days before it is loaded on to the tanker.

Shell insists that BP's proposals would create an opaque market and has instead put forward its own scheme, which would force the buyer and seller to agree on a grade before the sale.