Europe is investigating suspected manipulation of global oil markets, staging raids at some of the world’s biggest energy companies to gather evidence of possible collusion.
Three oil giants – Royal Dutch Shell PLC, BP PLC and Norway’s state-controlled Statoil ASA – on Tuesday confirmed that their offices had been raided in connection with the probe.
Oil-pricing agency Platts is also under investigation. Platts, a unit of McGraw Hill Financial Inc., is the custodian of the Brent crude contract, the de facto world benchmark for oil prices and base for the hundreds of billions of dollars of futures contracts that trade off it. Crude oil prices in turn influence the price of gasoline and other fuels.
The European Commission, the executive arm of the 27-country European Union, confirmed the probe but did not identify the companies by name. Nor did it specify how many companies were under investigation, leading to speculation that the probe may widen.
The investigation shows regulators remain concerned that global markets can be susceptible to manipulation even in an era of electronic trading and apparent price transparency. The oil investigation comes only a year after some of the world’s biggest banks were hit with enormous fines for rigging interest rate benchmarks.
“Officials carried out unannounced inspections at the premises of several companies active in and providing services to the crude oil, refined oil products and biofuels sectors,” the EC said. “The commission has concerns that the companies may have colluded in reporting distorted prices to a price-reporting agency to manipulate the published prices for a number of oil and biofuel products.”
The EC added that it “has concerns that the companies may have prevented others from participating in the price assessment process, with a view to distorting published prices.” The EC implied that every consumer in Europe would be a victim if the price manipulation allegations are proven: “Even small distortions of assessed prices may have a huge impact on prices … potentially harming final consumers.”
In London, David Nicholas, spokesman for BP, which is co-operating with the investigation, said he did not know the investigation’s scope.
The EC probe came seven months after Oil Trading SA, the Swiss trading arm of Total of France, one of the world’s biggest oil companies, complained to regulators that “several times a year, estimates of market prices on key [energy] indices … are out of line with our experience of the day,” according to the Financial Times.
Two months later, EU justice ministers agreed on an approach to harmonize criminal sanctions for market abuse in financial instruments, including commodities and commodity derivatives.
The EU took a hard stance on market manipulation in the wake of the Libor – London interbank offered rate – scandal earlier last year, in which several international banks allegedly manipulated the Libor rate by submitting false data on interest rates. Last year, Barclays and UBS collectively paid almost $2-billion (U.S.) of fines in Britain and the United States for the attempted manipulation of Libor, which is used as a reference point to price everything from mortgages to student loans on both sides of the Atlantic.
The Brent index compiled by Platts is one of the world’s two main oil benchmarks and is based on output from the North Sea, whose production is declining. (In an effort to keep Brent relevant, Platts has been shunting other oil sources into the calculation.) Futures and options based on Brent are traded on the Intercontinental Exchange (ICE). Those based on the larger West Texas intermediate (WTI) index are traded on the CME Group’s New York Mercantile Exchange market.
Because Brent contracts are less liquid, traders say they can be more readily manipulated than WTI contracts. The EC probe may be examining whether allegedly distorted pricing on the Brent index warped the value of futures contracts on ICE.
The CME Group had no comment about the EC investigation.
The EC probe is unlikely to have an immediate impact on oil prices, but it exposes the thorny problems of a less actively traded market setting prices for a major world commodity, said Phil Flynn, futures account executive with Price Futures Group in Chicago.
“It seems to be a situation where you don’t have a very liquid market and you depend on these agencies and the energy companies to come up with these prices,” Mr. Flynn said.
He said the long-term effect could be the return of the WTI contract as the dominant world oil benchmark, especially with U.S. unconventional crude production from regions such as the North Dakota Bakken surging. The International Energy Agency predicted last year that the United States could overtake Saudi Arabia and Russia as the world’s top oil producer by 2017.
The three oil companies known to be under investigation are all players in the North Sea, the source of the Brent crude. It is not known whether other oil companies active in the region are involved in the probe.
Calgary-based Nexen Inc., which is now controlled by Beijing, said it has not been approached, spokeswoman Patti Lewis said in a statement. Talisman Energy Inc. was not included in the search, spokeswoman Phoebe Buckland said.
Sneh Seetal, spokeswoman for Suncor Energy Inc., which has North Sea operations, said “I am not aware nor have I heard of any such investigation of Suncor.” Canadian Natural Resources Ltd. spokesperson Alishia Paradis declined to comment.
With files from reporter Shawn McCarthy in Ottawa
Editors Note: Sneh Seetal's title at Suncor Energy has been corrected in the online version of this story.