LONDON — Top oil companies have launched urgent talks to seek ways to save the tottering North Sea spot market from collapse after the sudden drop in world prices, traders with major oil firms said Tuesday.
Representatives of leading firms--including Shell International Trading and British Petroleum--are meeting in London to try to solve the crisis in the speculative market in Brent crude oil and to produce safeguards to protect future trade.
Trading has come to a virtual standstill since last week amid allegations of fraud and default on deals.
"The temptations to default are too enormous now," said one trader with a leading European company who asked not to be identified. "We're dead set on making the market more secure to ensure it doesn't disappear," he added.
The crisis broke when the Geneva-based trader and refiner Gatoil said it had been offered false nominations for cargoes of Brent loading at Sullom Voe terminal in Scotland's Shetland Islands, industry sources said.
The ripple effect has hit almost every company in the Brent market, where a cargo can be bought and sold more than 100 times, forming so-called daisy chains.
Plunging world oil prices, which have wiped out almost half of Brent's value since last November, lie behind the crisis.
Traders who incorrectly forecast market fluctuations have tried to duck out of deals on which they faced losses of many millions of dollars, the industry sources said.
Various proposals are under discussion to reform the market, which operates as an informal web of telex and telephone communication and has no central regulatory body to oversee transactions.
One plan entails setting up a central clearinghouse to coordinate the huge daisy chains. "This way no one could cheat . . . or nominate cargoes they didn't have," a trader said.
Another solution could be to create "performance bonds" whereby traders would chip in a percentage of a contract's value. This would be forfeited if obligations on a contract were broken by the buyer or seller.
Also being discussed was extending banks' letters of credit, which are used for most deals, to cover a longer period in which tankers could be loaded with oil.
This would create greater flexibility to solve problems in case loading at Sullom Voe was delayed by bad weather or if nominations of shipments turned out to be false.
But traders with smaller companies voiced caution over the informal talks, which are taking place while oilmen from all over the world are in London for the Institute of Petroleum's annual gathering. They said large firms might come up with a solution that suited them but that left out in the cold the small companies.
"It's possible the big 10 companies will find a solution, but that might mean doing business only with each other," said one London-based broker.