Platts FOB Med jet fuel assessment: revision of freight calculation

Platts has proposed making changes in the way it calculates the freight element in the formula it uses to calculate its FOB Med jet fuel assessment. Since October 1998, Platts has based its FOB Med jet fuel assessment on a freight differential from the Mediterranean to the Northwest Europe (NWE) market.

The formula was introduced because fixed price liquidity in the Med was (and remains) absent. Platts at the time saw escalating premia for spot and contract lots, and the FOB Med assessment was stagnating below actual spot market levels as these premia were locked in. Behind the move to a formula were the following assumptions: that a relatively liquid trading market provides a starting point for an assessment; that oil from the Med arbs into the north of Europe on a regular basis; and that a meaningful value could therefore be derived from the CIF Northwest Europe price. The CIF NWE price is a liquid market; the assessment is typically based on traded differentials to gasoil prices on the International Petroleum Exchange.

Freight formulae are used in a number of other markets assessed by Platts, most notably in the FOB Arabian Gulf assessments which are calculated using freight differentials to the more liquid Singapore and Japan markets. In general, such formulae are used only when the market is so illiquid that Platts believes it cannot make a viable assessment based on its usual criteria which include consideration of deals, bids and offers. The aim of such formulae is not to establish a theoretical value for the oil, but to come to as accurate assessment as possible of the tradeable value of the commodity.

The current freight formula uses the Worldscale flat rate Augusta-Rotterdam including harbour dues. This year, the flat rate was set at $5.57/mt, and harbour dues at Rotterdam of $0.45/ mt added. The flat rate is multiplied by Platts clean tanker rate assessment for 30kt cargoes Med-NWE, pro-rated from 30kt to 25kt, then multiplied by 1.3 to reflect the cost of superior jet-suitable tonnage. Under the original formula introduced in 1998, the multiple for jet-suitable tonnage was set at 1.2, but this was increased at the start of the year 2000.

As stated above, the formula was introduced on the assumption that most oil that travels through the Med arbs into NWE, and that by capturing the actual freight incurred, a viable assessment could be derived for the FOB Med.

In December 1999, the tanker Erika sank off the coast of France, spilling its cargo of 30,000mt of fuel oil. The incident led to radical changes in the tanker market. Many older vessels were scrapped, and oil majors instituted strict policies to tighten the quality of vessel they would accept at their installations. As a result, freight rates for good quality clean tonnage rose sharply even as the premium held by jet-suitable tonnage compared to typical clean tonnage decreased because of the overall improvement in the quality of the clean tanker stock.

The structurally higher freights depressed the value resulting from the Platts formula, and led Platts to question whether the formula in its present form was still valid.

Platts took a number of specific steps to determine this. In December 2000, it issued subscriber notes asking for feedback on whether the formula should be adapted. In May 2001, it held an open forum in London to gather more specific feedback.

Finally, based on the feedback from oil companies and airlines provided at the meeting and subsequently, Platts proposed in August 2001 specific steps to adapt the formula and increase its coverage of the premiums paid to the FOB Med formula.

Platts has at each stage communicated key aspects of its proposals to revise the FOB Med jet formula to the International Air Transport Association (IATA). At the request of IATA, and in the wake of the difficulties faced by airlines in the wake of the Sep 11 terrorist attacks, Platts extended the feedback period for the proposal to Oct 19. On Oct 9, Platts attended a working lunch held by IATA in Rome to allow airlines to ask questions about the likely impact of the reshaped formula.

The latest version of the subscriber note (carried in European Marketscan and on www.platts.com) follows:

AMENDMENT SEP 28: Following events in the US Sep 11 and the disruption to market activity since then, at the request of the industry Platts has decided to extend the consultation period on the proposed change to Jet methodology to Oct 19, 2001, proposed start date for a new jet assessment now Nov 1, 2001.

Following consultation with subscribers, Platts plans to implement several changes in its FOB Mediterranean jet assessment as follows:

A) Effective Nov 1 2001, Platts will introduce a new FOB Mediterranean assessment entitled Jet Aviation Fuel. The Jet Aviation Fuel assessment will be published at the bottom of the Mediterranean spot assessments table. The assessment will be a reflection of the proposal issued in June 2001. Details on the calculation methodology follow at the end of this note.

B) Platts Marine Department will assess a worldscale rate for jet cargoes for the route Med-Northwest Europe. The rate will be published on a daily basis in Platts Marine Alert and in the daily Clean Tankerwire, effective Nov 1, 2001. This rate will be applied to determine the netback calculation of the FOB Mediterranean Jet Aviation Fuel assessment.

C) Platts current FOB Med Jet assessment will continue to be assessed until Dec 31, 2002. This assessment will then be discontinued and replaced by the Fob Mediterranean Jet Aviation Fuel assessment Jan 2, 2003.

D) Effective Jan 2, 2002 to Dec 31, 2002, Platts will publish a new assessment to reflect the premium paid on spot basis to FOB Med jet. On Jan 2, 2003, the Platts premium assessment will reflect the premium paid to the Jet Aviation Fuel assessment. Market conditions may require that the basis for this assessment should be moved to Jet Aviation Fuel prior to Jan 2, 2003. In the event that Platts makes such a switch, 60 days notice will be given.

Platts invites final comment on the above proposal by Friday Oct 19, 2001, by e-mail to Juliet Walsh, juliet_walsh@platts.com, cc to Peter Stewart, peter_stewart@platts.com. Comments by fax to +44 208 545 6172.

Proposed Methodology for Jet Aviation Fuel:

Who initiated the latest proposed changes in the formula? Why?
What will be the impact of the changes in financial terms?
Will airlines have to pay premiums to the new assessment?
What is the significance of point D?
Have the airlines been fully consulted?

Who initiated the latest proposed changes in the formula? Why?

The changes have been made solely at Platts' initiative, as a result of the changes in trading patterns and freight developments detailed above and in the minutes of the May 30 jet fuel forum.

Platts' aim in holding the forum was to explore ways to enhance its methodology, and not to reach an agreement on what should be done. In the case of the FOB Med jet assessment, which has been an area of contention in the past, Platts identified from the start of the discussion that the objective of any change would be to make the assessment more accurate.

While Platts recognized that it was important to phase-in changes in a reasonable timeframe, and while Platts would use feedback from the meeting in formulating any proposals, the accuracy of its assessments was Platts' overriding concern.

Platts' overriding intention in making the proposed changes to the freight calculation was that the revisions should result in a more accurate assessment of the FOB Med jet fuel market, by more accurately reflecting the actual freight rates paid.

What will be the impact of the changes in financial terms?

That depends on market conditions. The spreadsheet below allows a ready comparison of the respective freight rates under different freight scenarios. It will be observed that in the "old" freight formula, in which the premium for jet suitable tonnage was set as a factor of 1.2 or 1.3 of the typical clean tonnage rate, the premium for moving jet fuel in $/mt increases sharply as the clean freight rate increases.

As an example, WS rates in 2001 have averaged WS 306 to Oct 8, and they averaged WS 226 in Q3 2001. Based on the 2001 multiplier of 1.3, freight rates associated with the average to date WS is around $28.75 and for Q3 around $21.25/mt. Based on zero premium for jet suitable tonnage, however, these same rates would have generated a $/mt freight cost of $22.00 and $16.25/mt respectively for the two periods. The "multiplier" effect becomes even more exaggerated at the extremely high WS rates of WS 500 seen at certain points in the post-Erika period; at this level, the $/mt freight mushrooms to $47.00/mt, whereas the actual freight based on zero premium for jet -suitable tonnage would be $11/mt less.

In assessing the freight for the "new" formula, Platts marine group expects the jet fuel premium (if any) to be expressed as an additional number of Worldscale points to the typical clean. Shipping sources have indicated that this superior tonnage premium has typically ranged between zero and around 50 worldscale points in recent months.

In this scenario, the "new" freight rate to NWE would typically be lower than that under the "old" formula and would result in a higher FOB Med assessment. However, this is not necessarily the case; indeed, at times of low worldscale clean freight rates and high jet fuel freight premiums, the reverse may be true.

See the chart to see the difference between the FOB Med jet fuel price actually assessed between October 1998-October 2001, and what the assessment might have been if the new formula were retrospectively applied under different scenarios of premiums for jet-suitable tonnage. Platts wishes to emphasize, however, that this chart should not be interpreted as having a direct bearing on the likely extra costs (if any) that lifters will incur as a result of any change in the freight calculation.

Will airlines have to pay premiums to the new assessment?

Platts does not get involved in commercial negotiations between market participants, and as such has no comment on whether premiums should be paid by jet fuel purchasers under the new formula.

Typically, oil companies and airlines have told Platts that the high premiums seen in recent years have been negotiated to compensate for the difference between the freight as calculated in the formula introduced in 1998 (and subsequently updated in 2000) and the actual freight incurred on the open market. As such, steps taken by Platts to make the formula more responsive to market conditions may impact the premiums.

Platts understands that many contracts in which Platts numbers are used for settlement and pricing purposes have conditions which allow for the renegotiation of contract terms when there is a substantive change in Platts methodology.

What is the significance of point D?

Platts intends to assess the spot market premiums paid to the FOB Med jet fuel assessment based on the old formula until these become illiquid.

Platts decided to introduce the revised FOB Med assessment based on the "new" formula with a lengthy notice period, to avoid as far as possible any disruption to the market; indeed, it will only be at the beginning of the year 2003 that the calculation under the old methodology is finally discontinued. What remains uncertain is, when market participants will wish to switch quotes-related contracts from the assessment based on the old to that based on the new formula.

Assessment of prevailing spot premiums are likely to be most accurate when based on a liquid market. If all contracts were to be moved to the new assessment at an early date, any spot premiums discussed in the market would be in relation to the "new'"assessment; whereas if contracts remain tied to the "old" assessment until the end of 2002, spot premiums discussed would likely be in relation to the "old" formula.

Platts cannot dictate the pattern of liquidity although, in practice, it is likely that the change from "old" to "new" will be made by companies gradually during 2002.

Platts will assess spot premiums in relation to the old jet formula so long as there is reasonable liquidity in this market. Point D) recognizes that liquidity patterns may change, however, and that Platts will need to respond --albeit with due notice-- if this happens. Platts advised that the notice period would be at least 60 days, because it wants to give parties adequate notice if changes in trading patterns require that the switch be made before the end of 2002.

Have the airlines been fully consulted?

Platts has published subscriber notes regarding the proposed changes in the Fob Med jet calculation in Platts European Marketscan and Platts Global Alert, and has placed these also on www.platts.com. Notification of the proposal has therefore been publicly available both to Platts subscribers and non-subscribers from an early date. Platts has also liaised with IATA and IACA with regard to the proposed changes, and these bodies have at their discretion been free to inform their members of the proposed changes.

Various airlines and IATA requested to be provided with historical data that would allow them to quantify the potential impact of the freight methodology change. Platts took the view that this data is available by subscription, and that airlines are free to purchase the data if they wished. Platts reporters have also informally discussed the impact of the proposed changes with a number of market participants by phone and email.

Platts is free to discuss ways to make its assessments more accurate with whatever market participants it chooses. At no point has Platts given advance notification to either airlines or the oil companies regarding any decisions on the substance of the proposed changes.

NOTE: Market participants should be aware that Platts publications are copyrighted, and that any form of redistributing of Platts' reports and its proprietary price assessments to parties who do not subscribe to the relevant Platts service, is a breach of US, international, and EU laws on copyright and misappropriation.

The appendix below contains the text of key subscriber notes issued by Platts, regarding the jet fuel FOB Med assessment methodology.

Appendix:

Platts wishes to clarify that the premium for jet-suitable tonnage will be assessed by Platts Marine Department, in tandem with the spot clean tanker rate, and will be published on a daily basis in Platts Marine Alert and in the daily Clean Tankerwire. The existing FOB Med Jet assessment will continue to be assessed until Dec 31, 2002, (and incorporating changes to flat rate assessment and harbor dues for 2002 as appropriate) when it will be discontinued, data no longer published or stored. The Jet Aviation Fuel assessment will be published at the bottom of the Mediterranean spot assessments table. Platts further proposes to publish the premium paid on a spot basis to the current FOB Med Jet from Oct 1, 2001 until Dec 31, 2002. Effective Jan 1, 2003, Platts will publish the spot premium paid to the Jet Aviation Fuel assessment. Platts invites final comment on the above proposal by Fri Sep 7 2001, by e-mail to Juliet Walsh, juliet_walsh@platts.com, cc to Peter Stewart, peter_stewart@platts.com. Comments by fax to +44 208 545 6172.

SUBSCRIBER NOTE: Platts subscribers are invited to attend a jet fuel forum discussion to be held on Wed May 30, 2001 from 9.30am at the Meridien Waldorf Hotel in London. Items on the agenda will include Platts methodology for assessing jet fuel in the Mediterranean. Attendance is strictly by registration only and as numbers are limited we encourage registration by one delegate per company. To register contact Celine Doukhan by e-mail at celine_doukhan@platts.com, or by fax at +44 20 8545 6269. Closing date for registration will be Fri May 18.

SUBSCRIBER NOTE: Effective Jan 2, the Worldscale flat rate Augusta-Rotterdam including harbour dues, used to calculate the netback formula for FOB Med jet, becomes $6.02/mt. This comprises a flat rate as defined by Worldscale of $5.57 /mt plus calculation of harbor dues at Rotterdam of $0.45/mt. Calculation of harbor dues is based on $0.79 per GT of vessel, converted to a per metric tonne basis. Platts would welcome industry feedback on the methodology used for the calculation of the FOB Med jet fuel assessment, including whether the factors for pro-rating and superior tonnage in the existing calculation should be adjusted. Please reply by email to Juliet Walsh, Managing Editor: Juliet_Walsh@platts.com, with CC to Peter Stewart, European oil manager at Peter_Stewart@platts.com or telephone: +44 208 545 6130.

Spot Worldscale rates (2000-2001)



"Old" vs "New" differential under various "superior tonnage" WS scenarios



Click on the icon below to see a spreadsheet showing Jet fuel freight rates under different Worldscale scenarios.

Worldscale is the tanker industry's method of calculating freight rates. The non-profit making Worldscale Association annually publishes a list of recommended US$/metric tonne rates between a number of ports, eg Milford Haven - Livorno $5.12/mt. These are based upon a typical tanker size and specification. If a charterer agrees to pay a tanker owner twice the amount of the US$/mt figure which Worldscale have published, then that is then described in the tanker market as 'Worldscale 200', which equates to '200% of what Worldscale suggests'.