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TOTSA
Friday, August 24, 2012
TOTSA TOTAL OIL TRADING SA Page 1 of 10World Trade Center 1
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Functioning and Oversight of Oil Price Reporting Agencies
TOTSA’s reply to the public consultation report published by the TECHNICAL COMMITTEE OF THE
INTERNATIONAL ORGANIZATION OF SECURITIES COMMISSIONS(document no. CR04/12, published in MARCH 2012)
The International Organization of Securities Commissions’ (IOSCO) Technical Committee (TC) has
published its Consultation Report as part of its objective of answering the mandate of the G20
Leaders’ Cannes Summit Final Declaration “to produce recommen
dations, in collaboration with IEA,
IEF and OPEC1, on the functioning and oversight of oil price reporting agencies”.
The ConsultationReport was prepared by the IOSCO Task Force on Commodity Futures Markets (Task Force).Submitted by E-mail to:price-reporting@iosco.orgSubject line: Functioning and Oversight of Oil Price Reporting Agencies.Type of software used for attachment: Microsoft WORD 2003
 
TOTSA
Friday, August 24, 2012
TOTSA TOTAL OIL TRADING SA Page 2 of 10World Trade Center 1
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Q1 Are you or your company currently subscribers to the services of PRA(s)? If so, how wouldyou rate the overall quality of the work being carried out by the PRA(s)?TOTAL is a subscriber to the major PRA services for the energy markets (oil, gas, coal, power,CO
2
, and biofuels). The work done by the PRAs can generally be considered conscientiousand professional. However, the published prices do not always represent those of the marketwith the same degree of accuracy. This heterogeneity exists both within individual PRAs andbetween PRAs. As well, the quality of the reporting is not always consistent over time. Finally,while certain PRAs have pricing processes that are reproducible using the underlying data,
others do not (the principal difference being the use of “judgement” that may bias prices
awayrather than toward the market).Q2 Please provide information on the impact of PRAs on physical oil and oil derivatives markets.Please support your comments with data on the volume and value of the related physical oil and oilderivatives business you are aware of, which is dependent on PRA benchmark prices (where possiblebroken down into the following categories: OTC; OTC cleared; or exchange-traded)
Are the prices of all oil transactions linked to PRAs?
Oil market pricing (crude or products) links sales to representative price references, includingPRA prices (75% - 80% of deals), futures markets such as NYMEX or ICE (15% to 20% of deals), or to producer country official selling prices (10% of crude sales).
Which PRA prices dominate the market?
Very approximately, for all transactions linked to PRA prices, Platts represent 90% to 95% of transactions on crude 85% to 90% of transactions on products, and 85% to 90% of OTCderivative transactions. The remaining share is covered by Argus and other PRAs which arepresent in niche markets.Q3 What are the impacts of PRA processes on oil trading markets, physical and/or derivatives?In your answer please comment on the quality of PRA processes, their strengths, as well as thepotential impacts of any perceived weaknesses.Traders, buyers, and marketers depend upon the PRA prices as a source of marketreferences for on-going transactions. Oil market players contribute to the price assessmentprocess by reporting their deals (ensuring the assessed prices take them into account). Thisinterdependence between the PRAs and the oil market players defines the price discoveryprocess.Platts (the dominant price reporting agency) imposes a methodology that does not furnish amarket price (based
on the day’s prices) but rather a price to the market.
Sometimes the criteria imposed by PRAs do not assure an accurate representation of themarket and consequently deform the real price levels paid at every level of the price chain,including by the consumer. The difference in methodologies between Platts and Argus is thegreater integration of the shape of the forward price curve by Platts than by Argus (or ICIS or  APPI, etc). Accordingly, when the market is in strong backwardation, Platts spot prices arelower than the rest and in contango they are higher.Inaccurate pricing is not simply an issue regarding the pricing of OTC contracts. Margins for refiners and retailers as well as prices for end-users are directly impacted by erroneous prices.
 
TOTSA
Friday, August 24, 2012
TOTSA TOTAL OIL TRADING SA Page 3 of 10World Trade Center 1
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Where these margins are particularly narrow (such as in Europe) the volatility and uncertaintyin PRA pricing methodologies can be very detrimental to the financial health of the companiesconcerned.Q4 Do you consider PRAs to have potential systemic impact on the financial system? Please givereasons for your answers.The increased penetration of oil in financial investment portfolios and the increased degree of co-linearity between both different financial markets and different commodity marketssuggests that a sudden and massive shift in oil markets could propagate into other markets. Atthe very least, covering large margin calls for oil could lead to a sell-off of other instruments.However, given the size of the oil market relative to the rest of the financial market, the overallimpact of such shifts is not likely to threaten the integrity of the financial system.In addition, the overall volume of activity on the paper and physical oil markets is considerablysmaller than all other financial markets combined. Overall trade on oil futures markets isaround 2 billion barrels per day (less than $250 billion per day). OTC markets might double or triple that volume of activity, but overall it remains well below the $1 trillion per day threshold.Q5 What are your views regarding PRA price methodologies, including your ability to identifymethodological errors? Do you consider that mechanisms or procedures exist to address any suchconcerns and are they adequate? Have PRAs demonstrated responsiveness in updating their methodologies to reflect market development?Where the PRA methodologies are detailed, reproducible, and scrupulously followed, theresults are generally consistent and close to the market. Where PRA methodologies
incorporate “judgement”, incoherencies can result.
 It is difficult for users to identify errors if they are not very intimately involved in the market on aday-to-day basis in order to see the transactions occurring that drive price formation and if they do not have the market experience to be able to tease out the errors in the PRAprocesses versus the reality of the market activity.
PRAs should emphasize that they are not assessing “flat” prices but rather a series of price
differentials (generally time spreads, EFPs, EFSs) from which they derive a flat price usingfutures prices. The flat prices used for indexing OTC contracts generally are not the basis of transactions in the physical market.Generally, PRAs are not responsive to proposed changes to their methodologies from marketplayers. However, they regularly seek input from market players when anticipating a change inmethodology to reflect market developments (though this input may not always be taken fullyinto consideration).
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