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Analysis: Soaring Brent pushes Indonesia to process sour crudes in 2018

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by December 21, 2017 General

The sustained strength in key Brent crude following the recent shutdown of the North Sea Forties pipeline has encouraged Asian end-users to switch from the expensive sweet crude complex in December, with Indonesia feeling the urge to upgrade its refinery systems next year to handle high sulfur crude oil.

Unlike many highly sophisticated refineries in Northeast Asia, Indonesian end-users have limited feedstock procurement options as a majority of the refineries are not capable of handling sour crudes, increasing the pressure on state-owned Pertamina to make the necessary changes to help reduce the country’s dependency on costly imported sweet crudes.

Last week, Pertamina said it will start to modify its refineries to process more high sulfur crude oil in 2018.

The modification program will start next year at the 125,000 b/d Balongan, 260,000 b/d Balikpapan and 348,000 b/d Cilacap refineries, a senior official told S&P Global Platts recently.

“We want to upgrade all our refineries gradually to be able to process sour crude. We will not add new units in the refineries but only upgrade the existing ones,” Pertamina’s refining director Toharso said.

“With the modification, we expect our refineries can process either sweet crude or sour crude,” Toharso added.

Regional sweet and sour crude traders said Pertamina had responded to the recent spike in Brent prices and the company’s ability to process sour crude in the future would help insulate it against Brent-Dubai price volatility.

“Obviously they are feeling the heat [because of rising Brent] benchmark prices,” said a sweet crude trader at a Chinese oil company.

“[Refinery] upgrades cost a lot of money but flexibility [of crude procurement] will help save even more,” a condensate trader at a South Korean refiner said.

Toharso said that Pertamina would start upgrading the Balongan refinery in May-June next year, adding that it was unlikely to be shut during the upgrade.

BRENT-LINKED CRUDE SEEN LESS COMPETITIVE

Asian trade sources indicated that Pertamina’s procurement cost per barrel would be generally higher than for most Northeast Asian refining companies as the Indonesian end-user typically pays a higher premium for the sweeter crude it buys.

The recent spike in Brent-Dubai price spreads would imply an even bigger procurement cost for Pertamina, compared to various Northeast Asian refiners that mostly buy relatively cheaper sour crude grades linked to the Middle Eastern pricing benchmark, regional traders said.

A wider Brent-Dubai spread typically makes various crude grades from the Mediterranean, North Sea, Black Sea, West Africa and Oceania that are linked to the European benchmark less attractive than Dubai-linked Persian Gulf and Far East Russian grades.

The Brent/Dubai Exchange of Futures for Swaps — a key indicator of Brent’s premium to the Middle Eastern benchmark that often serves as a barometer of the strength in the European crude complex — jumped to $3.73/b on December 12, the highest since June 7 last year when it was assessed at $3.76/b.

On a monthly basis, the EFS averaged $3.15/b so far this month, compared with an average of $2.70/b in November, $2.34/b in October and the highest since June last year when it averaged $3.57/b, Platts data showed.

In addition, the calendar month average of Platts Dated Brent, the outright physical pricing benchmark for various sweet crude grades, could surpass the Middle Eastern sour crude benchmark Platts Cash Dubai by more than $2.50/b in December.

So far this month, Dated Brent averaged $63.69/b, close to $3/b higher than Cash Dubai’s month-to-date average of $60.81/b. In November, Dated Brent averaged $62.62/b, compared with Cash Dubai’s $60.82/b.

Indonesia is one of the regular buyers of light sweet West African crude and many of Pertamina’s refinery units are designed to process distillate-rich Nigerian and Angolan grades such as Qua Iboe, Cabinda and Agbami.

Pertamina regularly buys around 2 million-4 million barrels of low sulfur West African crude every month. Mostly recently, the company issued a spot tender seeking two cargoes of 950,000 barrels each of Bonny Light, Escravos, Qua Iboe, El Sharara or Labuan for delivery in February.

“WAF [West African crudes] may not be as expensive as some of the regional [Australian and Malaysian] sweet grades but they are much more expensive than the regular Middle Eastern sour grades … besides, logistics cost more too,” said a sweet crude trader based in Singapore.

Pertamina acknowledged that it was easier to secure sour crude from the Middle East than bringing sweet crude cargoes from West Africa as the freight rate is lower.

Typical voyage time from major crude-loading ports in the Persian Gulf to Southeast Asia is around 20-25 days versus more than 35 days from West African ports.
Source: Platts

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