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Saturday, September 26th, 2020

South Korea aims to reduce dependence on Middle Eastern crudes

by September 27, 2017 General

South Korea may no longer depend as heavily on the Middle East for crude supplies as favorable global benchmark price trends and government incentives offer an impetus to refiners to explore other sources, a senior executive at a South Korean energy company said Wednesday.

South Korea is heavily exposed to international flat price changes as the country relies on imports to meet all its requirements for crude oil, putting pressure on local refiners to diversify procurement sources, said Chang Jihak, senior executive vice president at Hyundai Oilbank, during a panel discussion at the S&P Global Platts Asia Pacific Petroleum Conference in Singapore.

“Middle Eastern grades used to account for 90% of South Korea’s total crude imports … but [this could drop to] 70% or below,” Chang said.

South Korea bought 460 million barrels of crude oil from the Middle East during the first half of 2017, accounting for 84.9% of the total imports, Korean National Oil Corp. said in its weekly research note.

Chang pointed out that rising Dubai benchmark prices this year had opened a door for some major South Korean refining companies to broaden their crude buying options, with more than 30% of total purchases in recent months coming from outside the Middle East.

“Thanks to this year’s OPEC production cuts, we saw Dubai prices strengthen … the narrow [Brent-Dubai] spread [offers] a great chance to diversify our crude sources,” Chang said, adding that South Korean refiners had been buying crude from North, South and Central America as well as Europe. South Korean refiners, including GS Caltex, Hanwha Total Petrochemicals, Hyundai Oilbank and SK Innovation imported a combined 4 million-5 million barrels of US Eagle Ford crude and condensate, Mars Blend and WTI Midland, market sources with direct knowledge of the matter have said.

In addition, numerous crude cargoes from the Mediterranean found a home in South Korea, with close to a dozen Aframax vessels arriving in the country carrying Kazakhstan’s CPC Blend, Russia’s Urals Blend, and Algeria’s Saharan Blend, regional sweet and sour crude traders. BRENT-DUBAI SPREAD

The higher price of Dubai crude, and the subsequent narrowing of the Brent-Dubai spread, played a key role in stoking South Korea’s interest in crude sources beyond the Persian Gulf, Chang said.

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 general strength in the European crude complex — has narrowed sharply from last year.

The second-month EFS has averaged $1.41/b so far in H2, compared with $1.16/b in H1, S&P Global Platts data showed.

In comparison, the EFS averaged $2.57/b in H2 2016 and $3.33/b in H1 last year. A narrower EFS typically makes various crude grades in the Mediterranean, North Sea and West Africa that are linked to the European benchmark more attractive.

Regional crude traders said that the spread was unlikely to widen much from current levels, at least until H2 2018, as OPEC’s commitment to limit output and recent export cuts to Asia by major Middle Eastern producers, would support Dubai crude prices.

Abu Dhabi National Oil Co. recently cut its allocations for November-loading crude by up to 15% for the majority of its customers.

Dubai crude saw both its physical and derivatives market structures strengthen sharply this month, with the cash Dubai structure rallying to a two-year high last week.

Platts assessed front-month cash Dubai at $54.61/b at the close of Asian trade Thursday last week, taking into consideration trades for Dubai cash partials and a bid at $54.60/b standing at the end of the Platts Market on Close assessment process.

This put the spread between November cash Dubai and November Dubai swap at 39 cents/b for the day, the highest since August 31, 2015, when it was 64 cents/b.


The South Korean government remains supportive of the diversification efforts, offering incentives to local refiners to seek barrels beyond the Middle East, Chang said.

“Government incentives and freight rebate remain very much in place … any extra freight costs incurred from buying non-Middle Eastern crudes would be compensated by the government,” he said.

In late 2015, the government offered to fully compensate refiners for the difference in transport costs incurred when importing crude from regions other than the Middle East.

South Korean refiners pay Won 1,600 ($1.36) tax for every 100 liters of imported crude and get a similar amount of rebate on oil product exports.

This allows refiners importing crude from other than the Middle East to enjoy double benefits — subsidies for transportation costs and tax rebates. In addition, lower taxes might encourage end-users to tap into the North American markets, he said, referring to the free trade agreement signed between the US and South Korea in 2013.

The FTA, which became effective from March 2012, has eliminated duty on most of the US exports to South Korea of consumer and industrial products.
Source: Platts