Attacks on Saudi Aramco processing facilities on Sept. 15 disrupted 5 percent of the global oil supply. In the nearby Strait of Hormuz, VLCC tankers and their cargoes have been seized by national governments. Earlier this year, France-based Total S.A. took delivery of 1.3 million barrels of Russian crude contaminated with organic chlorides, and two South Korean refiners rejected multiple Eagle Ford-spec condensate cargoes due to oxygenate contamination. Moreover, once-mighty Venezuelan production has collapsed amid political and economic crisis. Although American oil production and exports have expanded to unprecedented levels to make up the gap, global disruption has had its costs.

The shale era produced vast amounts of oil with non-standard quality that was required to meet standardized quality specifications before shipment or delivery. Large-scale blending of varying grades of crude oil to meet these shipping specs compounded the risks of the global marketplace. As the Russian and South Korean scenarios demonstrate, there are widespread, well-founded concerns over blend quality. Marketers and refiners are placing greater emphasis than ever on obtaining "virgin" (unblended) versus "spec" (blended) barrels. Unfortunately, it is all too common for certain key measures of crude quality to get lost or overlooked during difficult-to-manage, in-basin blending processes.

The U.S. legal and contractual infrastructure has made slow progress accounting for these issues. Numerous supermajors and large marketing desks have updated their general terms and conditions to better account for what appears to be unending logistics problems and the allocation of risk to the parties involved. To address quality issues, this past January, Enterprise Products Partners LP (NYSE: EPD) implemented new quality requirements in Cushing, Oklahoma, to better identify differing grades of oil arriving from the Permian, the Rockies and Canada. Other oil pipeline operators are beginning to batch deliveries of differing virgin streams, rather than impose outdated quality rules that cause many shippers to blend their barrels to a spec while still in-basin.

Domestically, we are still playing catchup. The way we think about managing the risks posed by oil marketing — particularly with respect to lenders and capital providers — must evolve to accommodate the near-constant disruption of the global marketplace. The attacks on Aramco's facilities triggered an unprecedented 15 percent increase in the price of West Texas Intermediate (WTI), the U.S. benchmark, when commodity exchanges opened Sept. 16. The impact will be felt worldwide, including in the U.S., where crude exports could reach up to 5 MMbpd by the end of 2020.

A common and effective way for suppliers and marketers to mitigate risk exposure is to implement a rigorous and fast-paced internal review and compliance program. In the Dodd-Frank era, financial firms engaged in commodity marketing and trading were confronted with closely monitoring their price and risk exposure in real time. Because many trades are executed by a borrower's marketing affiliate (but balance sheet-based lines of credit are instead provided to a parent entity of the borrower, higher up in the capital structure), banks and borrowers alike must take care not to run afoul of modern Commodity Futures Trading Commission and U.S. Treasury regulations.

The proliferation of blending, combined with the lessons of Russian-origin and South Korea-bound cargoes, likewise prove that often-overlooked quality specifications should be reviewed deliberately in every marketing contract. The Conoco 1993 General Terms & Conditions — the industry's gold-standard contract terms — provides buyers the right to reject crude that is "contaminated," but fails to define a standard. (To be fair, it’s not known which GTCs, if any, were used in those transactions.)

While oil quality is accounted for in the Conoco GTCs, it gets short treatment and blending is not specifically addressed. Particularly if you are selling oil that is "virgin," or not strictly "merchantable" (think of skim oil, paraffin-rich grades, etc.), firms ignore metering, measurement and warranty provisions at their own peril. Of course, there are always the more conventional traps like the broad universe of receipt and delivery failures that may not amount to force majeure (and which we've seen in the marketplace).

Then there is the issue of insurance, as somebody has to pay when something goes wrong. A conscientious review of policies surrounding an oil marketing and logistics program, combined with minimum coverage requirements and enforceable noncompliance penalties for borrowers and counterparties alike, is a necessity in a world persistently on the verge of the next crisis.