Analysis: Papua New Guinea lures S Korean refiners with naphtha-rich Kutubu crude

Singapore — The increased mix of condensate component in Papua New Guinea's flagship Kutubu Blend crude may help the Oceania producer attract new customers in Northeast Asia, with multiple South Korean end-users finding the light sweet grade attractive for its higher naphtha yield.

The re-imposition of US sanctions on Iran in November 2018 had raised alarm bells among South Korean refiners and petrochemical companies as they relied heavily on Iranian South Pars condensate to produce naphtha, a critical ingredient for downstream chemical products and gasoline blending.

The South Korean end-users have been rigorously diversifying condensate supply sources over the past year and Papua New Guinea caught their attention recently as the drastic quality changes in Kutubu crude saw the grade become much lighter and its naphtha yield increase sharply.

The changes in Kutubu Blend's quality comes amid falling production at some of the heavier crude fields that make up the Kutubu Blend. At the same time, the share of condensate from the PNG LNG project mixed into the Kutubu Blend has increased, S&P Global Platts reported previously.

An assay by Kutubu field operator Oil Search issued in November 2018 showed that the Kutubu Blend has a gravity of 54.8 API and a sulfur content of less than 0.03% at the moment.

In comparison, an earlier assay by Oil Search issued in June 2014 showed that the grade had a gravity of 49.1 API and a sulfur content of 0.026%. Its 2010 assay showed a gravity of 44.8 API and a sulfur content of 0.044%.

The latest assay also showed that the yield of heavy naphtha was 34.5%, up from 28.8% in the June 2014 assay by Oil Search.

Kutubu's lighter quality first lured GS Caltex in February 2019, when South Korea's second biggest refiner imported around 300,000 barrels of the naphtha-rich grade.

This also marked the first time that South Korea purchased crude oil from Papua New Guinea since October 2015, according to latest data from state-run Korea National Oil Corp.

More recently, S-Oil imported 651,000 barrels of Kutubu crude in September and Hyundai Chemical received 683,000 barrels of the light sweet grade in October last year, company sources with direct knowledge of the matter told Platts this week.

CONDENSATE QUALITY

Hyundai Chemical, especially, expressed strong interest in Kutubu crude as the grade's new specifications were similar to their staple condensate, or ultra-light crude, feedstock grades.

"We have used the Kutubu blend in our condensate splitter and found no problem because the grade is light and sweet enough," a company source said.

Hyundai Chemical had processed mainly Iran's South Pars condensate prior to the sanctions. Over the past year or so, the company has been relying mainly on Qatar's Deodorized Field Condensate, or DFC, and Low Sulfur Condensate, or LSC, for its 130,000 b/d condensate splitter in Daesan complex.

Hyundai Chemical also took various other condensate and light sweet grades including Far East Russian Sakhalin Blend and Sokol crude, Malaysian Kimanis condensate, Nigerian Escravos condensate and Alba condensate from Equatorial Guinea, another company source told Platts.

HIGH SPOT PREMIUMS

However, lofty price differentials for Kutubu blend could deter South Korean buyers from importing the light sweet crude on a regular basis, at least in the near term.

"[Hyundai Chemical's condensate splitter] could use more Kutubu crude only if the grade's price is competitive," the first company source said.

Kutubu was assessed at a premium of $3.70/b to Platts Dated Brent on December 18, the highest level since commanding a $3.80/b premium on January 20, 2016, Platts data showed. The grade was assessed at a premium of $3.45/b Tuesday.

The outright price spread between Kutubu and Australia's flagship North West Shelf condensate averaged $2.85/b in fourth-quarter 2019.

The light sweet grade also commands a lofty premium against the Qatari condensate grades, with the spread between the light sweet crude and DFC assessed at $2.42/b Tuesday, Platts data showed.

South Korea paid an average of $64.30/b for Kutubu crude imported in Q4 last year, higher than the $62.22/b average paid for Qatari condensate received in the quarter, the KNOC data showed.

KNOC's import cost includes freight, insurance, tax and other administrative and port charges.

--Gawoon Philip Vahn, Philip.Vahn@spglobal.com

--Andrew Toh, andrew.toh@spglobal.com

--Charles Lee, newsdesk@spglobal.com

--Edited by Norazlina Jumaat, newsdesk@spglobal.com