By Peg Mackey and Alex Lawler
LONDON (Reuters) - A European investigation into alleged price rigging by major oil companies has drawn attention to leading price agency Platts and the way it sets oil price benchmarks.
Authorities on Tuesday carried out a surprise inspection at Platts' London bureau as well as the offices of Royal Dutch Shell <RDSa.L>, BP <BP.L> and Statoil <STL.OL>. Officials were searching for evidence that the firms had distorted prices reported to Platts in an attempt to influence the cost of oil.
The move follows more scrutiny of financial benchmarks by authorities since the Libor rigging scandal. Statoil said the suspected violations were related to the Platts price assessment process and may have been going on since 2002, when oil traded at just $20 a barrel, a fifth of its price today.
For more than a century Platts, a unit of McGraw-Hill <MHFI.N>, has provided clients with price benchmarks set by reporters for opaque energy markets. As the undisputed lead price reporter, its assessments are used to close physical and derivative deals worth billions in a $2.5 trillion market.
"Platts is the main price reference for the physical oil market," said Olivier Jakob, oil consultant at Petromatrix in Zug, Switzerland. "So if you were to close Platts tomorrow, you would have a very big problem."
Now the methodology designed by Platts to assess the value of oil is under scrutiny. One question may be whether the so-called Platts "window" or market-on-close (MOC) system - a daily half-hour period in which it determines prices through a series of bids, offers and trades - amounts to selective disclosure.
Platts' smaller rivals in the price reporting business - ICIS, a unit of Reed Elsevier <REL.L> and privately-held Argus Media - do not use a window-based process to assess prices. Argus said it has received no recent inquiries from European regulators. ICIS could not immediately be reached.
"The MOC process has faced criticism because it concentrates price discovery in a small assessment time window, perhaps making it more prone to potential manipulation," said IHS Energy analyst Roderick Bruce.
"Other pricing techniques employed by price reporting agencies, such as volume-weighted averages, have also come under scrutiny in recent months."
Platts declined to comment on Wednesday but has already said it disagrees with the suggestion that it has too much power and that its focus as an independent price reporting agency is to maintain the integrity of its assessment processes and the prices they produce.
Complaints about the process do not seem to have diminished what has been an extraordinarily lucrative part of McGraw Hill's business. The company's commodities-related revenues -- largely Platts -- have surged by more than 40 percent in two years to $489 million in 2012, according to an SEC filings.
It cited Platts' "market data and price assessment" as having fuelled last year's 17 percent growth. A series of acquisitions - including consultants Bentek Energy and Steel Business Briefing in 2011 - also boosted revenues.
Thomson Reuters <TRI.TO>, parent of Reuters news, competes with Platts, Argus and ICIS in providing news and information to the oil market.
A Reuters reporter observed the operation of the window last year at Platts' London offices and was briefed by a senior editor on the company's methods.
Companies post bids, offers and trades on Platts Global Alert, the company's screen-based news and pricing network. Reporters use phone and instant messenger to gather additional information.
In London, the window usually starts at 4 p.m.
Then, reporters huddle over computer screens to evaluate data - price, volume, delivery terms and specifications - on the basis of Platts' methodologies to set values, a process that can take up to two hours.
The MOC made its debut in Asian oil trading in 1992 and in Europe in 2002. Prior to that, Platts produced its daily assessments from a weighted average of deals done.
"There is an element of precision that has emerged," Dave Ernsberger, Global Editorial Director of Oil at Platts, told Reuters during the demonstration of the system last year.
"We've moved from a world of opinion to a world of fact."
Platts' influence in the world oil market has grown over time, prompting critics to say it's too powerful - acting as a rule-setter and barring some participants from the window.
For example, months before Lehman Brothers went under during the global financial crisis of 2008, oil traders voiced concern about Lehman's viability. Platts barred the bank from trading oil contracts on its system, a procedure known as "boxing."
Today, Platts routinely boxes companies temporarily for such things as shipping technicalities or failure to play by the agency's informal trading rules, reducing their influence in the market and, say critics, making Platts unusually powerful.
"If Platts blacklists you, you're out," said an oil market source, who declined to be identified. "We hate to be boxed."
Platts has a stringent process for letting new companies join the process of contributing to price assessments.
"Lehman showed Platts they were right to protect the sanctity of their window process and the counterparties who may not know better," said a senior oil executive at a major company who requested anonymity. "But what happens if they are wrong?"
The publisher has 240 companies that take part in its assessment process and says many more are lining up to join.
Platts' Ernsberger, speaking last year, said its discretion over who participated was justified to ensure the system worked well: "Platts is not where you prove yourself," he said.
"You have to have a track record: trading wherewithal to understand the methodology and logistics."
Another example of Platts' power arguably occurred in March over plans to reform the Brent oil benchmark, the world's main price reference for trading cargoes of crude oil.
Shell proposed introducing quality premiums to encourage more types of crude to be delivered into Brent forward contracts, an idea backed by BP. A few weeks later, both ended up agreeing to a counter-proposal by Platts, which was different in some respects to the changes the oil firms had sought.
Platts has faced scrutiny before. More than a decade ago, U.S. federal energy regulators in 2002 investigated the role published natural gas indices played in the California power trading scandal and price spike. They determined that traders had submitted false prices to publishers like Platts.
While power traders eventually adopted benchmarks based on trades conducted on the IntercontinentalExchange <ICE.N> for trading and price discovery, many natural gas contracts are still settled on published indexes like Platts' Gas Daily.
Oil traders on Wednesday said there was no sign of the investigation impacting on activity in the window and Platts' introduction of the quality premiums was working well.
"They are everyone's favorite enemy. We can't live with them, but we can't live without them either," a senior source at a trading company told Reuters. "The industry created a rod for its own back by going down the road of having a journalistic assessment many years ago."
(Additional reporting by Simon Falush, Julia Payne and Claire Milhench, and Emma Farge in Geneva; Editing by Anna Willard, Alastair Macdonald and Andrew Hay)