http://www.thetrumpet.com/index.php?q=6872.5382.0.0
Russia’s Espo Blend crude is just starting to hit the market, but as output ramps up it is expected to change the rules of the oil game in Asia at the expense of Middle East rivals.
Exports of the diesel-rich, medium-heavy sweet grade could rise to 600,000 barrels per day (bpd) in the next few years from 250,000 bpd in the first quarter, targeting refineries in China, Japan and South Korea, traders and analysts say.
The crude will move by pipeline to the Russian Far East coast, placing it close to Asian markets for shipment by tanker, fitting into Asia’s aim to diversify oil imports and limit dependence on the Middle East.
Provided refiners are content with the grade’s quality, the new supply may force Gulf producers to review their export strategies, crude pricing and even consider offering a competing grade blended from different crudes to match the Espo quality.
“It could change the demographics of the region’s crude buying. I mean how can Venezuelan crudes compete with an Espo that is directly pumped in when they have to be shipped halfway across the world?” said Al Troner, President of Asia Pacific Energy Consulting.
“It could force Gulf producers to lower their prices to Asia to stay competitive and not lose market share.” Asia is struggling with declining domestic output of lower-sulphur crude while supplies of sour grades from Opec producers have been curbed since end-2008.
This has helped Russia to boost its oil exports, led by cheaper Urals crude, as the country seeks to secure markets in the energy-hungry region and rely less on the West amid often frosty relations with the European Union.
The East Siberian-Pacific Ocean (Espo) pipeline offers the perfect vehicle for Russia to further increase oil exports to the growing economies in Asia, especially when the link to China comes online within two years.
“China particularly values crude that does not require waterborne transit as this has certain logistical advantages as well as better supply security attributes,” said John Vautrain, Senior Vice President of Purvin & Gertz Inc.
Competitive, but rough edges remain
Espo Blend, named after the pipeline, flows from East Siberian oilfields to a new terminal in the sea port of Kozmino, near Vladivostok, where it can be exported tax-free to Asia.
Russia, the world’s top oil producer as Saudi Arabia keeps to Opec-led supply curbs, plans to export 3.1 million tonnes (250,000 bpd) of Espo Blend via Kozmino in the first quarter of 2010.
Espo’s initial API gravity is around 34 degrees, with sulphur content of up to 0.6 percent, lighter than Urals and similar to Middle East benchmark Oman crude, traders say.
Its quality is still evolving as more Russian producers pump oil via the pipeline, making the grade unstable for some time, which could initially limit its popularity among Asian refiners.
“Nobody knows the final quality. The only known factor is that it will not be stable for a while,” said a Western trader.
Analysts say Espo Blend will eventually be ideal for Asian refiners because of their ability to handle higher amounts of sulphur and for the grade’s exceptional yield of middle distillates, based on initial assessments.
Medium-heavy sweet crude is not available in large volumes on the spot market. So, any new market share carved out by Espo Blend could force Gulf producers to blend their existing crudes to match the grade so as not to lose out, analysts said.
“These qualities, combined with the pipeline to China and the fact that Asian buyers are looking to diversify their crudes, mean Espo could be a game-changer for the region,” Troner said.
China has loaned $25 billion to Russia in return for supplies of Siberian oil for the next two decades.
The first stage of the pipeline has the capacity to move 30 million tonnes a year (600,000 bpd) from the town of Taishet to Skovorodino, from which a spur will run to the Chinese border, where half of the oil is projected to go by 2012.
The other half will be sent to Kozmino, where the second phase is due for completion in 2014. Till then, the oil will be moved by rail to the Pacific coast before being put on tankers for Northeast Asian ports.
Russia’s top oil producer Rosneft last month sold the first cargo of Espo Blend for late-December loading to Finnish trader IPP Oy at a premium of 50 cents a barrel to regional benchmark Dubai crude. New crudes often trade at discounts to entice buyers to test them, and some traders said the Espo premium was good compared with rivals such as Oman. But for now, Espo’s unstable quality may not yet attract refiners as the first cargo might had been resold at a discount to Trafigura, traders said.
The European trader also bought a January cargo from TNK-BP after taking another from Gunvor, bringing its total to 300,000 tonnes, stirring talk that Trafigura is building up a big stockpile of the new crude. But the brunt of the eventual impact could be felt by Oman – a medium-heavy grade like Espo – and Abu Dhabi’s Murban crude, as well as arbitrage barrels of African and Mediterranean crudes that are increasingly shipped to Asia.
China is a big buyer of Oman, which is among the most actively traded on the spot market in Northeast Asia, where an average 389,000 bpd of the crude has been shipped this year.
Lower demand for Oman would send sellers such as equity holder Shell scrambling for new markets. Big traders such as Vitol, Total, Sinopec and Chinaoil who are active buyers and sellers of Oman would also be affected.
Perhaps to meet this competition, which will affect its Arab Light crude markets, Saudi Arabia will put “millions of barrels” in commercial storage in Japan, in a deal that will place its oil near its major customers in Northeast Asia.
Exports from Kozmino are set to leap to 900,000 tonnes in January, a loading schedule showed this month, primed to make the Pacific port Russia’s No.3 seaborne oil outlet.
“Long term, when in full flow, it will displace the most expensive arbitraged barrels of Urals, then Oman, and possibly lighter barrels depending on quality,” said the Western trader.http://news.bbc.co.uk/2/hi/8376206.stm
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