Another Libor scandal?

16 May 2013 - 03:15 By Reuters
One of the many oil rigs sitting on the continental shelf of Gabon, West Africa. File photo
One of the many oil rigs sitting on the continental shelf of Gabon, West Africa. File photo

A European investigation into allegations of price-rigging by major oil companies has drawn attention to leading pricing agency Platts and the way it sets benchmarks for oil prices.

Authorities on Tuesday carried out a surprise inspection at Platts' London bureau, and at the offices of Royal Dutch Shell, BP and Statoil. Officials were searching for evidence that the companies had distorted the prices they reported to Platts in an attempt to influence the price of oil.

Financial benchmarks have come under increased scrutiny since the Libor-rigging scandal.

Statoil said the suspected violations were related to the Platts price assessment process and might have been going on since 2002, when oil traded at $20 a barrel, a fifth of its price today.

For more than a century Platts, a unit of McGraw-Hill, has provided clients with price benchmarks for energy markets. As the undisputed leading price reporter, its assessments are used in closing physical and derivative deals worth billions in a $2.5-trillion market.

The method designed by Platts to assess the value of oil is now under scrutiny. One question is whether the Platts "window" or market-on-close system - a daily half-hour during which it determines prices through a series of bids, offers and trades - amounts to selective disclosure.

Platts's smaller rivals in the price reporting business - ICIS, a unit of Reed Elsevier, and privately held Argus Media - do not use a window-based process to assess prices.

Argus said it has received no recent inquiries from European regulators. ICIS could not immediately be reached.

"The market-on-close process has faced criticism because it concentrates price discovery in a small assessment time window, perhaps making it more prone to manipulation," said IHS Energy analyst Roderick Bruce.

"Other pricing techniques used by price-reporting agencies, such as volume-weighted averages, have also come under scrutiny in recent months."

Companies post bids, offers and trades on Platts Global Alert, the company's web-based news and pricing network.

Reporters use phone and instant messaging to gather additional data.

In London, the window period usually starts at 4pm. Then reporters huddle over computer screens to evaluate data - price, volume, delivery terms and specifications - using Platts's methodologies to set values. This can take up to two hours.

The market-on-close made its debut in Asian oil trading in 1992 and in Europe in 2002.

"There is an element of precision that has emerged," Dave Ernsberger, global editorial director of oil at Platts, said during the demonstration of the system last year. "We've moved from a world of opinion to a world of fact."