Viewpoint: Asia looks further afield for crude supplies

Crude imports to Asia-Pacific are on course to rise in 2019, as falling regional supplies and price economics encourage refiners to look further afield to meet burgeoning demand.

Exports from two key regional suppliers — Vietnam and Indonesia — are shrinking. Vietnam produces about 240,000 b/d of crude, of which up to half is exported. Output has fallen from about 350,000 b/d in 2015 as the country's mature fields, including the producer of its main medium sweet Bach Ho grade, undergo natural declines. The start-up of the Ca Tam field offshore south Vietnam in early 2019 could slow the fall in production, although it is still unclear if output from Ca Tam will be consumed domestically or exported.

Vietnam's domestic refineries continue to broaden their crude slates with local grades and imports. State-owned PetroVietnam's Binh Son Refining and Petrochemical (BSR), which operates the domestic 145,000 b/d Dung Quat refinery, is increasingly taking more spot and term crudes offered by state-owned PVOil. PVOil and BSR in 2017 signed term deals buy crude from Azerbaijan's state-owned Socar and trading firm Glencore to supply Dung Quat. BSR plans to expand Dung Quat's crude-processing capacity by 30pc and upgrade its product slate by 2021.

Political factors are driving changes to market dynamics in Indonesia, with the government planning to absorb all of the country's oil production in an attempt to cut imports and reduce currency outflows. Jakarta in September put in place a new regulation requiring all foreign oil producers in Indonesia to offer their output to state-owned Pertamina, in a move that is expected to cut exports sharply. Indonesia currently produces around 800,000 b/d, of which 200,000-300,000 b/d is contractors' equity and is typically exported, according to the energy ministry.

Economics underpin demand

Tight regional supplies and a narrow Brent-Dubai exchange of futures for swaps (EFS) — Ice Brent's premium to Dubai swaps, and a measure of the west-east arbitrage — continue to underpin demand for arbitrage cargoes from Asia-Pacific refiners. And low freight rates have also periodically made economics for long-haul eastbound shipments more favourable.

US crude exports reached a record high of 2.33mn b/d in October, with Asia-Pacific importers South Korea, India and Japan filling three of the top four spots. South Korea took 457,000 b/d, India 251,000 b/d and Japan 173,000 b/d, behind only top buyer Canada.

Taiwan has also stepped up US crude purchases, with state-controlled refiner CPC taking delivery of roughly 40mn bl of mostly US West Texas Intermediate (WTI) for the whole of 2018 via monthly spot tenders, up from only around 2mn bl of WTI in 2017. Such arbitrage flows look likely to continue. CPC in October signed a firm term deal to buy WTI, the first ever agreement by a Taiwanese refiner to purchase US crude on a term basis. The term deal is for the delivery of 2mn bl/month (67,000 b/d) of the grade between February and June 2019. Flows of US crude to Thailand also got underway in 2018, with state-controlled PTT taking around 2mn-4mn bl/month of WTI, Bakken and Eagle Ford.

And PTT has taken Libyan crude through a term contract, in another first. The term deal likely began at the start of 2018, although it is unclear which grades it covers. PTT has bought spot cargoes of Libyan grades in the past, given the light sweet Amna and Bu Attifel crudes are a viable replacement for Vietnamese medium sweet crudes including Chim Sao and Te Giac Trang (TGT), making them suitable for Thai refineries. At least 4.6mn bl of Libyan crude is estimated to have gone to Asia-Pacific in November, mainly to China, up from 3mn bl in October.

Korea turns to CPC

Rising demand in northeast Asia for crudes that are rich in light and middle distillates has spurred eastbound shipments of Caspian grades such as light sour CPC Blend. The grade is naphtha rich, but has a high content of corrosive mercaptans.

Some South Korean condensate splitters, which have the flexibility to use naphtha as an alternative feedstock, have increasingly turned to buying cheaper naphtha in the past year because of relatively high condensate prices in Asia-Pacific and lower exports of Iranian South Pars condensate. The need for naphtha has likely prompted South Korean refiners to boost their intake of naphtha-rich crudes, such as CPC Blend, to produce more naphtha.

CPC blend exports to Asia-Pacific jumped to 216,000 b/d in the first 10 months of 2018 from 166,200 b/d in the whole of 2017, according to Argus data. Asia-Pacific destinations for CPC Blend include China, India, Japan, Malaysia, Singapore and South Korea. Exports to Korea during January-October this year soared to 136,000 b/d, a nearly 79pc increase from the same period last year. China bought an October-loading Suezmax this year, marking its first purchase of the grade since November 2015.

More established arbitrage flows have also increased in 2018, mainly underpinned by a narrow EFS, which makes purchases of crude priced against the North Sea marker more attractive to Asia-Pacific refiners. Asia-Pacific's west African crude purchases reached an eight-month high in September, as robust demand from China and unusually high levels of interest from Japan and South Korea offset lower buying from India. A total of 2.42mn b/d of crude headed to Asia-Pacific from west Africa in September, the highest since 2.53mn b/d in January. And Vietnam's PVOil bought Nigerian crude arriving in November for the Dung Quat refinery in a rare spot purchase tender, in what was likely the first time it has bought west African crude.