The oil and gas industry is being treated to a new burst of competition with the development of Russia's East Siberia-Pacific Ocean (ESPO) pipeline with its own blend of crude.
Indeed, traders expect Saudi Arabia to lower the prices of all its crude grades heading to Asia for August on slow demand from regional refiners as well as the intensifying competition from Russia's ESPO crude.
"I expect Saudi Arabia to cut differentials across the board again, as the sentiment for both light and medium grades are not so good," one trader with a Northeast Asia refiner told the Saudi Economic Survey.
"Saudi Arabia is trying to secure demand in the Asia-Pacific region," said another trader, who added, "It is closely watching ESPO activity."
Among the seven refiners and traders polled by SES, four said the differentials for light grades would likely fall more than medium and heavy grades as naphtha cracks slumped to 8-month lows.
Competition under way
This is the latest in an effort by the Saudis to forestall the sudden demand increase for the Russian oil, which started coming online last December. But it is not unexpected.
In March, Saudi Oil Minister Ali al-Naimi said OPEC members didn't see any threat in the growing volume of oil exports from Russia to the Asia-Pacific via the ESPO line.
When asked about crude exports via the ESPO line, al-Naimi said, "We're not worried about that, since we have the world's largest oil reserves and the world's largest production capacities. We are capable of competing with any country (OGJ Online, Mar. 26, 2010)."
So, the competition is now under way. The advantages of the new ESPO blend, already well documented, are hard to deny for Asian buyers.
For starters, the Russian crude costs less to transport than oil from the Mideast nations, taking just 3-4 days sailing time to reach Japan, compared with 20 days from the Middle East.
Apart from quicker shipping and lower transport costs, though, East Siberian crude also has a lower specific gravity than Middle Eastern oil, which enables production of more gasoline and kerosine.
However, the Russians remain intent on securing as much of the Asia-Pacific market as possible, and they apparently are willing to provide the necessary economic incentives to achieve their aim.
Just last week, the International Energy Agency forecast that producers of Russia's ESPO crude, in an effort to keep the popular grade competitive, will likely absorb most of the export tax Moscow recently reintroduced.
"Longer term, reports suggest that with the gradual phasing in of the full Russian tax level on East Siberian fields, and with most volumes sold on the spot market, it will likely be up to producers to absorb cost increases to assure that the grade stays competitive," IEA said.
If so, then we'll soon see just how al-Naimi and the Saudi Arabian oil behemoth respond.