Asia's Far East Russian crude customers prefer spot deals with non-Russian equity holders

Asian refiners and trading companies that regularly buy Far East Russian crude oil were increasingly showing preference to take spot cargoes from non-Russian equity holders in a way to reduce risk of any potential transaction and logistical hurdles, as well as settlement delays.

Close to a dozen of Japanese, South Korean, Indian, Chinese state-run and private sector refiners, as well as western trading houses actively participate in monthly spot tenders and sales in the Far East Russian sweet crude market. Trading managers at the companies indicated that financial sanctions against Moscow are not expected to lead to a complete blockade of trading ESPO, Sokol and Sakhalin blend crude cargoes, with spot deals for April deliveries being executed as per normal.

Still, Washington's focus on sweeping financial sanctions on Moscow, with the US and its allies blocking some Russian banks from accessing the SWIFT international payments system, could mean purchasing Far East Russian crude may become rather troublesome going forward, according to trading managers at the refiners, who declined to have their company names identified due to the sensitive nature of international corporate trading relationships.

In an effort to reduce any potential risk of facing legal, financial, administrative and logistical hurdles in buying the light and medium sweet Russian oil, the Asian refiners and trading houses are opting to secure their cargoes from non-Russian equity holders of the Far East Russian upstream projects, the trading sources told S&P Global Platts.

"The exclusion of Russia from the international banking and transaction system is confusing everyone and lacks clear details so it's very much unclear how this would affect Russian crude trades ... in order to avoid all these confusion and risks, it's probably better to buy cargoes from Indian and Japanese equity holders," said a crude and condensate trader at a western trading house who actively trades Southeast Asian and Far East Russian sweet crudes.

"It's not that trading with Russian suppliers are impossible or anything but if you have a choice, it would be a prudent strategy to buy from non-Russian suppliers, simply to avoid any extra paperwork and transaction delays doing businesses with Russian entities," said a trading desk manager at a major South Korean refiner.

Sokol crude for one, a light sweet grade coveted for its high yield of light and middle distillates as well as prompt delivery timespan for Japanese, South Korean and Chinese refiners, have multiple equity holders from different nationalities marketing multiple spot cargoes every trading cycle.

Typically, ExxonMobil, the Sakhalin-1 project operator, India's ONGC Videsh Ltd, or OVL, Japanese company Sakhalin Oil and Gas Development Co., or Sodeco, and Russian supplier Rosneft each have at least one or two 700,000-barrel cargoes to offer in the Far East Russian spot market every month.

Among recent trade deals concluded in the Far East Russian spot market, ExxonMobil sold 700,000 barrels of Sokol crude for loading in March to a South Korean end-user at a premium of around $5.70/b to Platts Dubai crude assessments on CFR Yeosu basis, according to trading participants with close knowledge of the matter.

India's OVL was heard to have awarded its tender offering a similar size cargo of the crude loading over April 19-25 to Glencore at a premium of around $7.85/b on a CFR Yeosu basis.

Japan's equity barrels

The Japanese refining industry was not overly worried about the targeted Western sanctions on Moscow potentially disrupting Japan's crude import flows from Russia as the country's dependence on Russian oil is minimal. Most of the Far East Russian barrels that regularly feed local refineries are equity barrels owned by Japanese companies, sources at a Japanese integrated trading firm based in Singapore and industry sources in Tokyo said.

Japan imported 117,470 b/d of crude oil from Russia in January, latest data from the Ministry of Economy, Trade and Industry showed, making up just 4.3% of the country's total refinery feedstock imports of 2.72 million b/d.

The breakdown of the Russian crude shipments for the month showed that Japan took 1.41 million barrels of Sokol, 1.47 million barrels of ESPO and 760,000 barrels of Sakhalin Blend crude.

Japan's Far East Russian crude purchases (Unit: barrels)

Source: Ministry of Economy, Trade and Industry

Apart from ESPO, which is primarily marketed by Russian suppliers including Surgutneftegaz and Gazprom, Sokol and Sakhalin Blend crude that regularly comes to Japan are equity barrels owned by Japanese upstream investors and trading firms, market and refining industry sources told Platts.

Tokyo-based Sakhalin Oil and Gas Development Co., or Sodeco, holds 30% stake in the Sakhalin-1 project that produces Sokol crude. The project comprises three offshore oil and gas fields Chayvo, Odoptu and Arkutun Dagi, located off the northeastern coast of Sakhalin Island in the Russian Far East.

Meanwhile, Japan's integrated trading firms Mitsui and Mitsubishi Corporation each hold 12.5% and 10% equity stake in Sakhalin Energy, the sole marketer of Sakhalin Blend crude.