Commodities 2021: Asia looks to embrace new Iraqi crude as refiners draw up cost-cut plan

Singapore — Asian refiners are poised to benefit from the sale of Iraq's new Basrah Medium crude oil in 2021 as the medium-heavy sour grade would enable them to align their Middle Eastern feedstock procurement options with their refinery linear programming models in a more cost-effective manner.

The entire Iraqi Basrah crude complex would undergo a major specification overhaul due to the introduction of the new export grade, and would break up the existing refinery oil product slate layout for Middle Eastern crude feedstocks, operations and trading managers at India's BPCL, China's PetroChina, and South Korea's GS Caltex and SK Innovation told S&P Global Platts.

However, the new Basrah Medium grade opens up a new feedstock procurement option, allowing regular Asian buyers of Iraqi oil to flexibly choose the most suitable items out of the three (Basrah Light, Medium and Heavy) in terms of the Gross Product Worth (GPW) value, depending on the changing refining margins every market cycle, the refinery sources said.

In the current environment with ample supply and weak refining margins, competitive pricing would be a driving factor when refiners source for crude feedstocks, and usually new crude will need to be priced at a discount to attract buyers, JY Lim, oil markets adviser at S&P Global Platts Analytics said.

India, China and South Korea are Asia's top three importers of Iraqi crude oil.

India's state-run refiners are open to the idea of actively buying Basrah Medium in 2021, oil ministry officials said, adding that refiners would be able to devise a more flexible crude procurement strategy for next year.

Chinese and South Korean refineries in most cases blend multiple crude grades before processing the feedstocks in their CDUs, but the new Basrah Medium grade could help the fuel producers bypass some steps in the blending process.

Feedstock blending requires lots of calculations and adjustments because refineries must find perfect distillate yield ratios in accordance with their linear programming models, according to a plant operation manager at GS Caltex.

"The new grade may save us some trouble from having to find other multiple lighter or heavier feed grades to blend with," the GS Caltex source said.

In early-November, Iraq's State Oil Marketing Organization notified its customers that it was introducing the new Basrah Medium grade to spilt Basrah Light into two crudes to support the stability of its crude export streams.

Official selling price

For Indian, South Korean and Chinese refineries that primarily run on medium and heavy sour Middle Eastern grades to produce middle distillates, the new Basrah Medium could be a cheaper alternative to Basrah Light, Saudi Arab Medium, Oman Blend and other Persian Gulf grades.

Officials and feedstock managers at China's independent refineries and state-run Indian refiners told Platts that sulfur content in Basrah Medium crude might be a little too high but the companies would still be keen to regularly procure some spot cargoes as long as the price is right.

In theory, Basrah Medium is expected to be priced somewhere between Basrah Light and Basrah Heavy, according to the BPCL and GS Caltex trading managers.

For Asian customers, SOMO last set Basrah Light for loading in December at a premium of 45 cents/b to the Oman /Dubai average and Basrah Heavy at a discount of 95 cents/b to the same average. For cargoes to load during the first-half of 2021, Basrah Medium could be priced at around 40-50 cents/b below Basrah Light and it should be cheaper than Abu Dhabi's Upper Zakum, Saudi Arabia's Arab Light and Medium, the trading managers said.

Quality in question

Uncertainties surrounding the quality of Basrah Medium and the expected change in Basrah Light and Basrah Heavy specifications may deter some Asian refiners from embracing Iraqi grades as a staple diet next year.

A feedstock manager at one of the PetroChina refineries said the salt content of Basrah Medium seems to be higher than desired.

Another refinery source at China's state-run Sinopec said the plant has some interest to try and test the new grade, but it will probably not seek the crude in large volumes next year due to its relatively high sulfur content.

A source with Norinco Huajin refinery said they were in the middle of finalizing the contract for Basrah crudes for 2021, as they still need to study the new crude specification and figure out the appropriate procurement ratio for Basrah Light and Basrah Medium.

Normally, the company would fix a term contract to secure around 16 million barrels of Basrah Light a year, a company source told Platts.

Basrah Medium will have a specific gravity of around 27.9 API with a sulfur content of 3.0%, while the Basrah Light and Basrah Heavy grades will be around 33 API and 24 API, respectively, according to SOMO.

Basrah Light and Basrah Heavy were initially marketed by SOMO as an API of 34 and 26 degrees but these grades have been much heavier in recent years as new oil fields came on-stream, changing their quality.