A decision last week by the U.S. Energy Information Agency may have cost the Oklahoma oil patch a bit of international recognition.
The EIA chose to adopt Brent crude — priced in London — as the standard benchmark for oil prices, instead of West Texas Intermediate, which is priced in Cushing and has been the historical benchmark for domestic oil.
Practically, the change is expected to have little effect on Oklahoma producers.
WTI has traded $15 to $25 a barrel below Brent prices for much of the past five years as crude oil production in Oklahoma, Texas, North Dakota and other central-U.S. oil fields has outpaced pipeline capacity.
Because of the flood of new oil, millions of barrels of storage capacity has been built throughout Cushing to hold the crude as it waits in line before heading to Gulf Coast refineries.
The government said in its Annual Energy Outlook 2013 that it made the change “to better reflect the price refineries pay for imported light, sweet crude oil” and to take “into account the divergence of WTI prices from those of globally traded benchmark crudes such as Brent.”
The difference between crude oil prices has been especially important to Oklahoma City-based Continental Resources Inc., which is the largest producer in the Bakken field in North Dakota and Montana.
The new benchmark is a recognition of how the price differences have affected domestic producers, said Jeff Hume, Continental's vice chairman of strategic growth initiatives.
“Right now it's probably a logical thing to do because WTI is so disadvantaged from a lack of pipeline infrastructure,” he said.
While the price difference has been significant for several years, Hume said he expects relief soon.
“That should cure itself over the next two years or so with pipeline infrastructure growth,” he said. “That should break the logjam at Cushing and allow that huge amount in storage to finally get to the Gulf Coast refineries.”
The southern leg of TransCanada's Keystone pipeline, which is under construction, promises to move more oil from Cushing to the Gulf Coast beginning in late 2013 or in early 2014. Seaway's expansion along a similar route is expected to open in the first quarter of 2013.
Tulsa-based Magellan Midstream Partners is working to help relieve the strain in Cushing by reversing a pipeline that will allow producers in the Permian Basin in west Texas to send their oil directly to the Houston area, bypassing Cushing altogether.
In the meantime, producers now will use international prices when looking at production and reserves.
The change likely will not affect sales or profits. But it could make reserves in the ground look better because at higher prices, producers can afford to recover more of the oil and natural gas held deep below ground.
“If you're calculating your reserves with Brent prices, it will look like you have more reserves because you will hit your economic limit later,” said Rand Phipps, who is chairman of the Mid-Continent Oil and Gas Association and chief operating officer at Oklahoma City-based Mustang Fuel Corp.