Aggressive pricing is just one of three main strategies Middle East producers use to defend their collective share of important Asian oil markets, says Arab Petroleum Investments Corp. (APICORP).
The others: entering downstream joint ventures in Asia and welcoming Asian investors in Middle Eastern upstream plays.
Asian markets are increasingly important to Middle East producers with the shift in consumption growth from industrialized countries, represented by the Organization for Economic Cooperation and Development, to non-OECD countries and with the increase in tight oil production in the US.
Trade shifts
A drop in US imports has shifted exports from West African producers toward Europe and Asia, APICORP points out. At the same time, Russia has increased exports to Asia while holding shipments to Europe steady, and Latin American exports to Asia are rising.
While total Middle Eastern oil exports rose to 19.8 million b/d in 2014 from 18.9 million b/d 4 years earlier, competition from Russia and West Africa lowered the European share by 300,000 b/d to 2.1 million b/d.
“This has prompted some key exporters such as Saudi Arabia to market their crude in Europe more aggressively,” says the December edition of APICORP Energy Research. “Saudi Aramco recently sold its first cargos to Poland and Sweden in many years.”
In the US, refineries still need heavy crude from the Middle East but have competing supply from Canada, imports from which reached a record of 3.4 million b/d in August. Saudi exports to the US fell to 1 million b/d in August from a recent high of 1.6 million b/d in April 2014.
In response to these trade shifts, Middle East producers have increased exports to Asia despite the toughening competition there. During 2010-14, APICORP says, their collective exports increased to 13.9 million b/d from 13.2 million b/d.
Asian strategies
Participation by Middle Eastern exporters in Asian refining is well established.
Aramco Overseas, for example, owns interests in the 670,000-b/d S-Oil refinery in South Korea and Showa Shell Sekiyu KK of Japan, which operates three refineries with capacities totaling 445,000 b/d. Saudi Aramco Asia Co. owns an interest in the 240,000-b/d Fujian Refining & Petrochemical Co. refinery and ethylene plant in China. And Kuwait Petroleum International Ltd. has a stake in the 200,000-b/d Nghi Son Refinery & Petrochemical LLC complex under construction in Vietnam.
APICORP says Aramco might buy a stake in a China National Petroleum Corp. refinery and retail properties and has signed preliminary deals for possible downstream partnerships in India. It says Kuwait has signed memoranda of understanding with Indonesia and China about potential downstream partnerships.
Oman has an interest in the 120,000-b/d Bina refinery in India and Qingdao Lidong Chemical Co. in China and is reported to be interested in a joint venture refinery in Indonesia.
Upstream investments by Asian entities in the Middle East include those by Chinese companies in Iraq, which APICORP says largely explain a doubling of Iraq’s exports to China in the past 3 years. Chinese companies have Iraqi equity oil totaling 470,000 b/d.
Asian investors will compete strongly for opportunities in Iran as that country’s exploration and development become accessible under a new licensing framework.
“China’s CNPC is thought likely to take on the giant Azadegan North field, where it already has done some work, while Sinopec is likely to operate the Yadavaran field,” APICORP says.
In the UAE, the new 40-year Abu Dhabi Co. for Onshore Operations (ADCO) concession “will involve many Asian companies,” according to APICORP. Equity shares awarded so far by Abu Dhabi National Oil Co. have gone to Abu Dhabi veteran Total of France, Inpex of Japan, and GS Energy of South Korea.
The 75-year predecessor concession expired in 2014.
Price discounts
To push exports in Asia, Iraq’s State Oil Marketing Organization has offered price discounts and split its crude stream into heavy and light grades to address traders’ concerns about quality.
Iran also has discounted oil sold in Asia, narrowing the premium of its light crude over Arab Light to 15¢/bbl for October, November, and December deliveries. Saudi Arabia and Kuwait also have offered discounts.
“Middle Eastern exporters have also offered attractive payment schemes to buyers in Asia,” APICORP says. “Under these agreements, Iraq, Kuwait, and Iran have given some of their Asian customers—typically cash-squeezed Indian refineries—a grace period of 60-90 days to pay for crude imports, equivalent to a 50-75¢ discount per barrel.”
