American shale oil has a new benchmark, and a driving force behind it is one of the Bakken’s own.
The new benchmark is called American GulfCoast Select (AGS) and Continental’s Harold Hamm is among its architects.
The new benchmark was designed to rival the landlocked U.S. West Texas Intermediate futures contract, which is based on delivery to Cushing, Oklahoma, and which has typically been used to reflect the value of a barrel of Bakken crude oil.
The delivery location for WTI, however, is 500 miles from water, and that has led to market distortions in the past. Most notably, it led to negative $38-dollar futures contracts last year during the pandemic.
Brent, meanwhile, is priced on an island in the North Sea, with immediate access to tanker storage. That insulates Brent from market distortion like that caused by the supply glut caused by the Saudi-Russian price war during the pandemic.
The new benchmark is based on Gulf Coast delivery instead of a land-locked location, essentially giving shale a Brent of its own. That will better reflect shale oil’s value in the world market, and should prevent market distortions due to lack of storage infrastructure.
Hamm, in a recent editorial circulated by the Montana Petroleum Association, said the negative future contracts for WTI were a wake-up that the situation at Cushing, Oklahoma, through which a lot of Bakken crude oil still travels, was no longer tenable.
“The benchmark on which we had relied for decades was on longer reflective of the migration of U.S. crude oil production to the global market,” Hamm said. “I knew we needed to shift toward a benchmark that could more accurately and reliably price crude oil in America.”
The Gulf Coast will be a natural for that, Hamm added, with growing infrastructure and a naturally occurring migration of resources that supports not just America, but the world.
“We think a futures contract in the most interconnected market center in the country, with a widely accepted quality spec, which settles with guaranteed delivery of crude oil is an important new alternative for the industry,” Hamm said. “The task force has worked tirelessly to create a marker with transparency and liquidity that is waterborne for this modern era.”
Two different agencies have separately launched AGS benchmarks, S&P Global Platts and Argus Media.
Platts American GulfCoast Select said its benchmark will reflect the value of waterborne light sweet crude supplied from the Permian in west Texas and New Mexico on major pipelines to the Gulf.
Argus, meanwhile, designed its benchmark to reflect activity at Houston, a key market hub, but said it will later expand to cover other, robust liquid trading locations including Corpus Christi, Nederland, Clovelly, and St. James.
Both companies developed their ASG benchmarks working in close consultation with the American GulfCoast Select Best Practices Task Force Association, which Hamm founded.
While both benchmarks appear to be focusing on Permian production, the pricing for that barrel will still better reflect the value of a barrel of crude from the Bakken, North Dakota Petroleum Council President Ron Ness told the Williston Herald.
“You know, you have to kind of break into these pricing mechanisms and people have to start to use them,” Ness said. “There’s really not an official way to create a Bakken Benchmark, So this benchmark is very similar to what we think a Bakken barrel will be.”
Dan Kish, senior fellow at the Institute for Energy Research, told the Williston Herald the addition of a new and transparent benchmark is a win-win for both producers and for the nation.
“It is a reflection of the Bakken’s importance to the country and the world,” he added. “And a testament to the hard-working men and women of the region that we’ve reached this new benchmark.”
Hamm, meanwhile, said the release of the ASG benchmark is an important milestone for the future of American energy.
“The Gulf Coast offers near limitless storage options and represents both the domestic and international markets. Water access is imperative to making a viable market,” he said. “This new benchmark will better align where our industry is headed in the future. America reached energy independence in 2019—another one of those milestones many said would never happen—as we became a net exporter of oil and petroleum products. Our role today as an energy exporter has grown exponentially and has potential to continue to grow for the next several years. This pricing mechanism will allow us to serve the American market, exporting to global markets the highly sought-after light, sweet crude that is changing our world for the better.”