Viewpoint: China to maintain grip on ESPO Blend crude

Spanish Market: Crude oil
28/12/18

Exports of Russian ESPO Blend crude to China will continue to rise in 2019 as other Asia-Pacific refiners turn to alternative light crudes.

China has been the biggest buyer of ESPO Blend in the past year, lifting 65-80pc of the monthly volumes exported from the Kozmino terminal in Russia's far east. Chinese buyers took almost the whole of the seaborne ESPO Blend programme in the fourth quarter of 2018, partly as a precaution against expected falls in Iranian and Venezuelan supplies. China took more than 620,000 b/d of the light grade that loaded at Kozmino in October and November, giving the country a record 96pc share of shipments from the terminal.

Chinese buying has surged in the last few months on concerns Iranian crude shipments would fall as a result of US sanctions, and because of steadily declining supplies from Venezuela. Strong refining margins in the run-up to early October public holidays in China added impetus. China's search for alternative shipments ahead of the reimposition of US sanctions on Iran is likely to have driven imports from Russia to a new high of 1.7mn b/d in October.

China's demand for ESPO Blend has now been rising for a few years, especially after more Chinese independent refiners received crude import quotas and rights to import crude in 2016. China's imports of ESPO Blend from Kozmino are on course to hit a record high of 497,000 b/d in 2018, up from 474,000 b/d in 2017 and 472,000 b/d in 2016. China took only 306,000 b/d of ESPO Blend from Kozmino in 2015.

Pipeline supplies to rise

The Kozmino exports make up only part of China's ESPO Blend demand. It also imports ESPO Blend directly through a pipeline spur from the ESPO system as part of long-term contract between Chinese state-owned CNPC and Russian producer Rosneft. CNPC is taking 580,000 b/d in 2018 through the pipeline spur, which runs from Skovorodino to Mohe, plus 35,000 b/d on tankers that loaded at Kozmino as part of the contract. CNPC may be able to take all of the 615,000 b/d it is contracted to receive from Rosneft through the pipeline spur by 2019. This would cut Rosneft's Kozmino loadings for CNPC and potentially free up capacity at Kozmino for the Russian firm.

Rosneft has signed a new term contract to supply Chinese state-controlled firm ChemChina with up to 48,000 b/d of ESPO Blend from Kozmino in 2019. Rosneft may have signed the deal in anticipation of the extra supplies it will have available for export from Kozmino. ChemChina will likely take the crude for its own refineries in China.

Rosneft is also maintaining a long-term supply deal with Chinese private-sector investment firm CEFC. The deal began in early 2018 and volumes will rise, with CEFC expected to receive 800,000-900,000 t/month (about 210,000 b/d) of Rosneft crude through Kozmino in 2019. This implies total deliveries of 9.6mn-10.8mn t, compared with the 7.1mn t CEFC will receive in total in 2018. CEFC resells the Rosneft cargoes, usually to Chinese refiners or to trading firms that eventually move the volumes to Chinese independent refiners, which are big buyers of the grade. Chinese independent refiners bought 200,000 b/d of ESPO Blend on a delivered ex-ship Shandong basis in November for January delivery, Argus surveys indicate.

Japan, Korea cut back

Demand for ESPO Blend from the rest of Asia-Pacific has eased this year and is unlikely to recover significantly. South Korean refiners processed little ESPO Blend in 2018 as they purchased similar quality North Sea Forties crude and boosted their imports of US crude, mainly light sweet WTI. South Korea was the second largest buyer of US crude in October.

Around 26,000 b/d of ESPO Blend from Kozmino went to South Korea in 2018, but those shipments headed mainly to Yosu or Keoje, where firms including China's state-controilled Unipec have storage.

Japanese refiners, mainly JXTG and Taiyo, took about 55,000 b/d of ESPO Blend in 2018, down from 75,000 b/d in 2017 and 65,000 b/d in 2016. Japan imported 154,000 b/d of the Russian crude in 2015, before Chinese independent refiners emerged as big buyers of the grade.

The strong demand from China also curbed ESPO Blend purchases by other buyers in Asia-Pacific. Refiners in the Philippines, Thailand, Singapore and New Zealand took about 34,000 b/d this year, compared with 45,000 b/d in 2017 and 53,000 b/d in 2016. Around 103,000 b/d of ESPO Blend went to refiners outside of China, Japan and South Korea in 2015.

Most Asia-Pacific buyers have been reluctant to compete with their Chinese rivals for ESPO Blend this year, especially when prices of the crude start to surge. Chinese demand lifted Kozmino spot premiums for ESPO Blend to benchmark Dubai to four-year highs of about $6.60/bl in October.

Increased availabilities of light arbitrage crude in Asia-Pacific — from Nigeria, Libya, the Caspian and the US — have also made these grades more attractive for refiners outside of China.

Seaborne ESPO Blend exports through Kozmino could rise to more than 640,000 b/d in 2019 based on capacity requests submitted by oil producers. This compares with expected shipments of around 625,000 b/d from the terminal in 2018. Russian pipeline operator Transneft plans to complete expansion work on the ESPO system next year to increase overall capacity to 735,000 b/d from 2020, in line with loading capacity at Kozmino. But it is highly likely that most of the increased ESPO Blend export volumes will end up in China.

Related news posts

Argus illuminates the markets by putting a lens on the areas that matter most to you. The market news and commentary we publish reveals vital insights that enable you to make stronger, well-informed decisions. Explore a selection of news stories related to this one.

29/04/24

US commends China's Middle East mediation

Washington, 29 April (Argus) — The US hopes China will continue using its diplomatic influence in the Middle East after the two countries cooperated earlier this month to de-escalate tensions between Israel and Iran, US secretary of state Tony Blinken said today. "We did come very close to an escalation, a spread of the conflict," after Israel and Iran exchanged aerial attacks on each other's territory, Blinken said at a special meeting of the World Economic Forum in the Saudi Arabia capital Riyadh. The US saw that China used its influence in Iran to prevent an outbreak of a broader regional conflict "and that's a positive thing," Blinken said. Beijing stepped in last year to mediate an agreement between Tehran and Riyadh to normalize relations, playing a mediation role that the US could not carry out on its own. The US supported Chinese efforts to normalize Saudi-Iranian relations "because, if we can find through diplomacy ways to ease tensions and to avoid any conflict, that's a good thing," Blinken said. China has "a clear, obvious interest in stability in the Middle East," he said. "They obviously depend on the region for energy resources. There are many vital trading partners here." China provides a critical economic lifeline to Iran by absorbing nearly all of Iranian crude exports, "which is another challenge," Blinken said. But the US sees China as acting in its self-interest to help bolster stability in the Middle East. Finding some common ground on Iran was a rare positive spot during Blinken's visit to China last week. Blinken pushed his Chinese counterparts to put an end to private Chinese companies' supplies for Russia's military industry, while President Xi Jinping accused the US of undermining China's economic growth. "China and the US should be partners rather than rivals," Xi told Blinken during their meeting in Beijing on 26 April. The two countries should find common ground "rather than engage in vicious competition," Xi said. The US contends that Chinese companies supply 70pc of the machine tools and 90pc of the microelectronics for the Russian military industry, allowing Moscow to significantly increase weapons output in the past year. It remains to be seen whether the US threat of sanctions against Chinese companies accused of helping Russia's military industry will work, Blinken said. By Haik Gugarats Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Service firms talk up long-term gas prospects

29/04/24

Service firms talk up long-term gas prospects

New York, 29 April (Argus) — Leading oil field service firms are bullish on the outlook for natural gas demand in coming years even though the fuel remains stuck in the doldrums for now, with US prices near pandemic lows amid oversupply after a mild winter. "This is the age of gas," Baker Hughes chief executive Lorenzo Simonelli says, adding that global demand for the power plant and heating fuel is due to climb by almost 20pc through 2040. "Gas is abundant, lower emission, low cost, and the speed to scale is unrivalled," he says. Halliburton also sees natural gas as the "next big leg of growth" in North America, driven by demand for LNG expansion projects, although its current plans do not envisage any comeback this year. Given a shrinking fracking fleet and lack of new equipment being built, the stage is set for an "incredibly tight market" in future, chief executive Jeff Miller says. A recovery in natural gas activity in the US may not happen until the end of this year or even 2025, Liberty Energy chief executive Chris Wright says. "Customers need to see that prices have firmed, that export volume demand actually is pulling upward at a meaningful rate," he says. On recent first-quarter earnings calls, service firms were upbeat about international growth prospects in the face of escalating geopolitical tensions in the Middle East. The backdrop remains one of growing demand for oil and gas and an "even deeper focus" on energy security, according to Olivier Le Peuch, chief executive of SLB, the world's biggest oil field service company. SLB, formerly known as Schlumberger, expects overseas growth momentum to make up for a slowdown in North America this year. "The relevance of oil and gas in the energy mix continues to support further investments in capacity expansion, particularly in the Middle East and in long-cycle projects across global offshore markets," Le Peuch says. But results in North America will be depressed by the combination of low gas prices, capital discipline and producer consolidation. International rescue Halliburton expects international revenue growth in the "low double-digits" for the full year, with some margin expansion given the tight market for equipment and labour. Steady activity levels are seen in North America after land completion activity bottomed out in the fourth quarter of 2023 and rebounded in the first quarter. "The world requires more energy, not less, and I'm more convinced than ever that oil and gas will fill a critical role in the global energy mix for decades to come," Miller says. The positive outlook is reinforced by customers' multi-year activity plans across markets and assets. Baker Hughes forecasts "high single-digit growth" when it comes to the outlook for international drilling and completion spending this year. But customer spending in North America is expected to fall in a "low to mid-single-digit range" when compared with 2023. "We continue to anticipate declining activity in the US gas basins, partially offsetting modest improvement in oil activity during the second half of the year," Simonelli says. Beyond 2024, upstream spending is seen growing further across international markets, albeit at a "more moderate" pace than seen in recent years, according to Baker Hughes. SLB paced a decline among oil service stocks at the end of January when state-controlled Saudi Aramco scrapped plans to increase crude output capacity to 13mn b/d from 12mn b/d. But Saudi Arabia has stepped up its plans to boost gas output, by 60pc by 2030. This new energy mix was not anticipated six months ago, but it will "not have a natural impact on our ambition for growth" in Saudi Arabia, Le Peuch says. And Saudi gas plans will require substantial investment in gas infrastructure, which is a "long-term net positive" for Baker Hughes, Simonelli says. By Stephen Cunningham Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Production, patience driving Canada’s oil sands profits

29/04/24

Production, patience driving Canada’s oil sands profits

Calgary, 29 April (Argus) — Canadian oil sands operators enjoying firm profits on strong production are getting ready for a major boost when a new export pipeline to the Pacific coast goes into commercial service this week. The federally owned 590,000 b/d Trans Mountain Expansion (TMX) remains on track to start operations on 1 May, and the line has already started to bear fruit. More than 4mn bl of Canadian crude is being pushed into the C$34bn ($25bn) expansion for linefill, helping to work down inventory levels in Alberta while lifting local prices relative to international benchmarks, as intended. The largest four oil sands companies — Canadian Natural Resources (CNRL), Cenovus, Suncor, and Imperial Oil — are all shippers on the expansion. They closed 2023 with a new production record of 3.6mn b/d of oil equivalent (boe/d) combined in the fourth quarter, and are targeting further increases as they plan to fill the new pipeline. About 80pc of their output comes from their core oil sands businesses, with the balance from natural gas and offshore projects. The higher output compensated for a slight dip in prices, helping to push profits higher. First-quarter 2024 results are likely to be a similar story, but it is the second quarter when producers look ready to shine as prices climb to multi-month highs. A combined profit of C$26bn in 2023 was a stellar result for the big four oil sands operators, despite a 25pc decline from the record C$34bn set the previous year. Their massive projects are agnostic to daily price swings, instead focused on uptime, long-term fundamentals and capitalising on key step-changes such as the one TMX presents. Patience in the oil sands is key. TMX will cater largely to heavy crude producers, which saw diluted bitumen prices in Alberta rise only slightly quarter on quarter to $58/bl in the first quarter. But climbing global benchmarks in April and a shrinking heavy sour discount with the help of TMX linefill now has the outright price for the crude approaching $70/bl. This is above guidance given in 2024 corporate budgets, and far above oil sands operating costs that for some are as low as $12/bl. The TMX factor TMX will nearly triple the existing 300,000 b/d Trans Mountain system that connects oil-rich Alberta to the docks in Burnaby, British Columbia. The expansion was first conceived more than a decade ago with the intention of being operational by late-2017, but cost overruns and repeated delays put the project in jeopardy. Canadian producers that sought growth during that period of frustration are poised to take advantage of this new era of excess export capacity. CNRL, Cenovus and Suncor have been significant buyers in the oil sands in recent years, doubling down on the world's third-largest deposit of oil while many international companies fled amid regulatory uncertainty. The government itself enabled a foreign operator to leave Canada, buying the Trans Mountain system from Kinder Morgan in 2018. But as Prime Minister Justin Trudeau's Liberal party sees TMX to completion, and then the line's planned sale, it is also readying legislation towards something more on-brand for climate-concerned Ottawa: carbon capture. A carbon capture and storage (CCS) project spearheaded by Pathways Alliance — a consortium of the six largest oil sands producers — is awaiting federal and provincial help to push their proposal forward. Federal incentives are soon to become law, the Trudeau government said this month, with the expectation that tax credits will advance the massive C$16.5bn project and start to offset oil sands greenhouse gas emissions to meet net zero pledges for all parties involved. TMX represents a new era for Canadian crude producers, but so too does CCS, as it could attract even more investment into Alberta's oil sands region. By Brett Holmes Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

S Korea’s SK Innovation sees firm 2Q refining margins

29/04/24

S Korea’s SK Innovation sees firm 2Q refining margins

Singapore, 29 April (Argus) — South Korean refiner SK Innovation expects refining margins to remain elevated in this year's second quarter because of continuing firm demand, after achieving higher operating profits in the first quarter. SK expects demand to remain solid in the second quarter given a strong real economy, expectations of higher demand in emerging markets and continuing low official selling price (OSP) levels. This is despite the US Federal Reserve's high interest rate policy and oil price rallies, which are weighing on crude demand. The company's sales revenue dropped to 18.9 trillion won ($13.7bn) in the first quarter, down by 3.5pc on the previous quarter. Its energy and chemical sales accounted for 91pc of total revenue, while battery and material sales accounted for the remaining 9pc. But SK's operating profit increased to W624.7bn in January-March from W72.6bn the previous quarter. This came as its refining business flipped from an operating loss of W165bn in October-December to an operating profit of W591.1bn in the first quarter. SK attributed this increase to elevated refining margins because of higher oil prices, as well as Opec+ production cut agreements and OSP reductions. First-quarter gasoline refining margins almost doubled on the previous quarter from $7.60/bl to $13.30/bl, although diesel and kerosine edged down to $23.10/bl and $21.10/bl respectively. SK Innovation's 840,000 b/d Ulsan refinery operated at 85pc of its capacity in the fourth quarter, steady from 85pc in the previous quarter but higher than 82pc for all of 2023. The refiner's 275,000 b/d Incheon refinery's operating rate was at 88pc, up from 84pc in the fourth quarter and from 82pc in 2023. SK plans to carry out turnarounds at its 240,000 b/d No.4 crude distillation unit and No.1 residual hydrodesulphuriser, both at Ulsan, in the second quarter. Its No.2 paraxylene unit in Ulsan will have a turnaround in the same quarter. By Tng Yong Li Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Singapore’s Jadestone cuts 2024 output guidance

29/04/24

Singapore’s Jadestone cuts 2024 output guidance

Sydney, 29 April (Argus) — Singapore-listed independent Jadestone Energy has cut its 2024 oil and gas production guidance, citing disappointing first-quarter group production. Jadestone said the impact of planned and unplanned downtime across its portfolio resulted in it narrowing its guidance from 20,000-23,000 bl of oil equivalent (boe/d) to 20,000-22,000 boe/d in its results for 2023 published on 29 April. Average production for January-March was 17,200 boe/d, which Jadestone said reflected the impact on its Australian assets, including the 6,000 b/d Montara oil field, of an active cyclone season at the start of 2024. The firm produced 14,000 b/d in 2023, up from 11,500 b/d in 2022. But problems at Montara and lower realised oil prices resulted in a loss of $91mn in 2023 following a $9mn profit recorded in 2023. Jadestone's realised oil price of $87.34/boe in 2023 was 16pc lower than $103.85/boe a year earlier. Proved and probable reserves at the end of 2023 totalled 68mn boe, a 5pc increase on a year's earlier 64.8mn boe, mainly because of the acquisition of a 9.52pc stake in Thailand's Sinphuhorm gas field and increases at the Cossack, Wanaea, Lambert and Hermes oil fields offshore Australia and the Akatara gas field in Indonesia's Sumatra. By Tom Major Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Business intelligence reports

Get concise, trustworthy and unbiased analysis of the latest trends and developments in oil and energy markets. These reports are specially created for decision makers who don’t have time to track markets day-by-day, minute-by-minute.

Learn more