Oil Benchmarks Go From Trusted to Tainted as EU Missed Warning

Oil Benchmarks Go From Trusted to Tainted as EU Missed Warning

The European Union’s top energy official ignored a warning delivered in 2009 about potential manipulation of Platts oil benchmarks “because markets trusted” them.

Andris Piebalgs, who was EU energy commissioner from 2004 to 2010, cited the confidence traders had in the pricing system when a lawmaker questioned the reliability of Platts’ prices more than three years ago. The warning went unheeded until May, when EU antitrust officials raided Platts, Royal Dutch Shell Plc (RDSA), BP Plc (BP/), and Statoil ASA (STL) as part of an investigation into the possible rigging of benchmark energy assessments.The EU’s oil probe escalated global action beyond financial benchmarks such as Libor, the London interbank offered rate. Regulators warned of “huge” damage to consumers if manipulation is confirmed and drew comparisons with the bank-rate scandal, which has seen Royal Bank of Scotland Group Plc, UBS AG (UBSN), and Barclays Plc (BARC) fined about $2.5 billion. Platts publishes the Dated Brent benchmark that helps determine the price of more than half the world’s oil.

If the market “trusts” in the pricing-mechanism, then it “has a reason to trust,” Piebalgs, now the EU’s development commissioner, said in an interview in Brussels on June 27, referring to the oil-pricing system now under scrutiny. “I always believed that Libor is very reliable. It seems that sometimes things need to be checked.”

‘Reality Check’

Piebalgs in January 2010 dismissed concerns raised in a written question from Portuguese politician Ilda Figueiredo. He responded that liquidity flowed to “markets perceived as transparent” and that this “provides a ‘reality check’ of the reliability of services provided by Platts and similar entities.”

Spearheaded by Competition Commissioner Joaquin Almunia, the EU probe follows a series of critical reports about the $3.4 trillion-a-year oil market as early as 2011 from the International Organization of Securities Commissions.

The investigation, which extends to undisclosed crude-derived products and biofuels, underscores how pricing in some energy markets lacks the transparency of financial products such as stocks and U.S. corporate bonds. The U.S. Federal Trade Commission opened an investigation that mirrors the EU review, two people familiar with the matter said.

EU ‘Mistake’

The EU’s executive arm “obviously” made a mistake in failing to review the price-formation mechanism used by Platts earlier, said lawmaker Joao Ferreira, who has continued to prod the European Commission to take action after Figueiredo left the European Parliament. The process “is everything but transparent,” Ferreira said in a phone interview.

Figueiredo didn’t immediately respond to e-mails sent via the Portuguese communist party in Lisbon and her former political group at the EU parliament in Brussels.

The EU is currently reviewing “thousands of pages” of documents from the May 14 raids in its investigation into possible collusion by traders, Cecilio Madero, the EU’s deputy director-general for antitrust, said last week.

EU investigators in May also requested records from some of Europe’s biggest trading houses, including Vitol Group, Gunvor Group Ltd. and Glencore Xstrata Plc. (GLEN)

Platts, a unit of New York-based McGraw Hill Financial Inc. (MHFI), provides benchmark assessments on physical markets, using data on actual trades and its own editorial judgment.

Its North Sea Dated Brent benchmark sets the price of half the world’s crude, from Canada to Australia. Its kerosene assessments are used by the airline industry, where fuel accounts for about a third of operating costs. In the biofuels markets, the company assesses the price of ethanol and biodiesel as well as ethyl tert-butyl ether, an additive that’s used in gasoline production.

‘Zero Tolerance’

Kathleen Tanzy, a Houston-based spokeswoman for Platts, has said the company hasn’t been accused of any wrongdoing and is cooperating fully with the commission’s review. She declined to comment about Piebalgs or questions raised by Figueiredo.

The three oil companies inspected have all said they are cooperating with the commission. Speaking two days after the antitrust raids, Statoil Chief Executive Officer Helge Lund said the company has “zero tolerance” for breaches of the rules. Shell is committed to the “highest standard of corporate behavior,” CEO Peter Voser said May 21.

Weekly Meetings

As energy commissioner, Piebalgs joined weekly meetings with fellow members of the EU executive arm, including Neelie Kroes, Almunia’s predecessor as competition chief.

Kroes’s spokesman Ryan Heath declined to immediately comment on whether she had looked into potential oil-price manipulation during her tenure. She is now a commissioner responsible for telecommunications policy.

Piebalgs, a Latvian politician, said the EU’s investigation into rigging of Libor, opened in 2011, changed perceptions about the reliability of benchmarks.

Still, he said he has “not heard” that the commission is systematically investigating benchmarks.

The oil probe may have been triggered by a complaint and “does not mean necessarily that Platts’s credibility is under threat,” he said. The commission may be reacting to someone arguing “that the prices are not being fairly treated.”

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To contact the reporter on this story: Gaspard Sebag in Brussels at gsebag@bloomberg.net