Whenever oil traders buy or sell crude oil cargoes, they must agree to a crude price made up of three components: the absolute price (A), a time differential (T) and a grade differential (G).

At Petroleum-Insight, we choose to focus on the G factor as A and T are determined amongst other things by the price of deals done in the futures and forwards markets, and the price at which identifiable cargoes can be bought or sold today respectively.

Based on the numerous crude oils we have come across, we strongly feel that crude oil valuation models used by oil companies and industry consultants do not sufficiently take into consideration some increasingly important quality characteristics. Acidity, for example, plays a major role on price differentials especially regarding the recent emergence of West African crudes and new producers. Yet, models used by players in the industry only focus on the two main factors in crude oil valuation namely API° and Sulphur content. As a result, governments from producing countries often fail to understand why there are receiving a discount for their product. A proper and thorough valuation is essential mainly for three reasons:

• Help governments manage their budget better as a proper crude valuation will translate into better revenue forecasting for new production streams.

• Enhance governments and oil companies trust in one another in their pricing transactions, which in return will lead to sound investments at every level.

• Contribute to the transparency effort in the oil sector in order to maintain the oil market international.