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Russia lures Asia oil buyers as Mideast scraps for share

Wednesday, February 18, 2015 - 10:12
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Middle East oil producers already scrapping for share in Asia must now contend with more supply from Russia.

[HONG KONG] Middle East oil producers already scrapping for share in Asia must now contend with more supply from Russia.

Russia, the world's second biggest crude producer, boosted sales to China, Japan and South Korea by 25 per cent last year, increasing its portion of shipments to 8.7 per cent, from 7.2 per cent in 2013, according to government data compiled by Bloomberg. Saudi Arabia accounted for 24 per cent, down from 26 per cent, while Qatar and Kuwait also ceded market share.

Gulf producers are now offering record discounts for Asian buyers amid a global crude glut. As European demand weakens and shale takes the US closer to energy self-sufficiency than at any time since the 1980s, suppliers are focusing on Asia, which the International Energy Agency forecasts will replace the Americas as the biggest consuming region this year. Rising sales to Asia are helping Russia's economy weather the conflict in Ukraine, sanctions and collapsing energy prices.

"Asian customers want to diversify supplies and Russia has the crude so it's a win-win situation," Victor Shum, a Singapore-based vice president at IHS Inc, said by phone Tuesday. "The alternative for Russia is shipping crude to the west, to Europe, but Europe is not a region with growing demand. Asia is the place." Russia sold about 51 million metric tons of crude to China, Japan and South Korea last year, from 41 million in 2013, the data show. The countries, three of the region's four largest oil consumers, imported a total of 592 million tons. Comparable data for India, the fourth, are not available.

Saudi Arabia sold 142 million tons, down from 146 million. Qatar's shipments slid 7.4 per cent to about 30 million tons. Kuwait's sales remained at about 41 million tons, cutting its market share to 7 per cent from 7.2 per cent.

The Saudis widened discounts on crude supplies to Asia 10 times in the past 15 months, setting its benchmark Arab Light at a record discount of US$2.30 a barrel in March. Other Middle East suppliers including Iran and Kuwait typically follow the Saudi pricing. The country led a decision by the Organization of Petroleum Exporting Countries in November to maintain output in an attempt to curb higher cost supply from outside the group and reduce the glut.

Asia will account for two-thirds of the growth in global oil demand this year, according to the Paris-based IEA. Daily consumption of 31.2 million barrels will take the region above the Americas at 31.1 million barrels. Europe's use is forecast to shrink to 14 million barrels.

While Saudi Arabia's hold on the Chinese market, the biggest after the US, slid to 16 per cent in 2014 from 19 per cent the year before, it's unlikely to lose its place as the top supplier, according to Amy Sun, a Guangzhou-based analyst at ICIS China. The nation boosted its market share in Japan, the world's third-biggest consumer, to 32 per cent from 30 percent.

"Chinese refiners still love Saudi crude because supplies are stable and refining units are suitably configured," Ms Sun said by phone Feb 6. "If prices stay attractive, Saudi market dominance may well be intact over the next five years." Asian refiners are limited in their options because plants are built to process only certain types of crude. Alternatives such as Venezuela's heavy, high-sulfur cargoes aren't viable for Japanese companies, according to Takayuki Nogami, a senior economist at Japan Oil, Gas and Metals National Corp. Russia's East Siberia-Pacific Ocean crude, or ESPO, is a similar quality to Murban oil from Abu Dhabi and favored by Japanese and South Korean refiners.

Deeper discounts also may help Middle East producers defend their sales in Asia. Iran set its Light crude at a record discount on Feb 10, based on a formula linked to Saudi prices. Qatar and Kuwait may become "more aggressive in offering generous discounts," Nogami said by phone on Jan 28.

Brent crude slid to the lowest level in almost six years on Jan 13 amid the highest US production in three decades. While futures have rebounded 38 per cent from this year's low of US$45.19 a barrel amid signs US drilling is slowing, they're still 46 per cent below the 2014 peak. The contract for April closed at US$62.53 on the ICE Futures Europe exchange in London on Tuesday.

The collapse in oil combined with western sanctions against its annexation of Crimea has taken Russia to the brink of recession, prompting the ruble to lose almost half its value against the dollar in the last year. The economy is reliant on oil and gas for about 70 per cent of exports and half its budget.

ESPO Crude Russia built the ESPO pipeline from the Siberian town of Taishet to Kozmino on its east coast in an effort to supply more crude to Asia. The port loaded its first cargo in 2009 and the pipe's second phase was completed in 2012. Tanker shipments scheduled from Kozmino rose to a record of 2.6 million tons in March, according to loading programs obtained by Bloomberg. They averaged about 2 million tons a month in 2014.

OAO Rosneft, the biggest publicly traded oil producer by output, signed a long-term contract with China National Petroleum Corp in 2009, supplying 15 million tons in 2013. That year, it agreed a new contract with CNPC for 325 million tons over 25 years, according to its website.

Rosneft plans to boost shipments to the east by 30 per cent to 32 million tons this year, it said Feb 4. Exports to China are forecast to increase 27 per cent to 29 million.

"Russia is in this market-share competition for sure," Wu Kang, a Beijing-based analyst at FGE, an energy consultant, said by phone Feb 12. The country is "wanting to export as much as possible."

BLOOMBERG