South Korea aims to further diversify crude import sources amid supply, price uncertainties

South Korean refiners cheered OPEC and its allies' decision to continue raising output in January, but the crude importers aim to continue diversifying their supply sources by lowering their dependence on Middle Eastern producers and raising imports from the Americas to tackle uncertainty in global supply-demand balance and price volatility.

South Korea's major refiners and petrochemical firms including SK Innovation, Hyundai Oilbank, Hanwha Total and GS Caltex have sharply reduced dependence on Middle Eastern crude and condensate, while ramping up the share of Americas oil in their feedstock baskets to-date in 2021, latest data from state-run Korea National Oil Corp. showed.

The trend is expected to continue as the companies consider the best way to minimize any negative impact caused by the ongoing supply and demand uncertainties, as well as wild price swings, is to have a wider variety of crude supply sources, according to trading and operation sources at the major refiners.

Major state-run and private refiners across Asia breathed a sigh of relief after the OPEC+ producer group agreed Dec. 2 to raise production quotas by 400,000 b/d as planned, shrugging aside market jitters over the emergence of omicron and US-coordinated releases from strategic petroleum reserves.

However, the South Korean refiners aim to maintain healthy balance in their crude supply sources and avoid depending too heavily on the major OPEC, especially Middle Eastern, producers as global market conditions are susceptible to drastic and abrupt changes during the COVID-19 pandemic, the sources at the major refiners told S&P Global Platts.

Middle East vs. Americas

South Korea has traditionally been relying heavily on Middle Eastern sour crude, with the world's fifth biggest crude importer taking more than 80% of its refinery feedstock requirements from the Persian Gulf producers around a decade ago, but the ratio has fallen drastically this year.

The share of Middle Eastern crudes in South Korea's total refinery feedstock import basket during the first 10 months was 58.7%, a sharp decline from 70.2% before the pandemic in 2019 and 81.8% in 2010, the KNOC data showed.

In contrast, the share of US, Mexico and Brazilian crudes in the country's import basket rose sharply, with the producers in the Americas combined supplying 21.9% of South Korea's crude oil requirements so far this year, compared with 17.5% in 2019 and less than 0.5% in 2010.

"The OPEC+ could scrap its production hike strategy at any moment depending on market conditions and Middle Eastern official selling prices have been seen rather expensive over the past several trading cycles ... hence it's ideal not to depend too heavily on Persian Gulf supplies," a sour crude trading manager at a major South Korean refiner, who declined to be identified due to the sensitive nature of the producer-end-user business relationship, said.

For the first ten months this year, South Korea imported 101.445 million barrels of US crude, up 8.8% from 93.265 million barrels received a year earlier, the KNOC data showed. The country also received 20.3 million barrels from Brazil during January-October, up 55.9% from 13 million barrels imported a year earlier.

South Korean refiners are especially attracted to the cost of US and Brazilian crudes as the companies find these more economical in times of high Middle Eastern OSPs.

South Korean refiners paid on average $69.26/b for Saudi crude shipments over January-October and $69.49 for Kuwaiti crude over the same period, according to the KNOC data. In comparison, shipments from the US cost an average $68.39/b over the same period, while the refiners paid on average $68.33/b for Brazilian medium and heavy sour crude grades.

Demand, supply uncertainty

Looking ahead, the South Korean refiners said their near-term crude procurement strategy and plans would depend heavily on whether the new coronavirus variant could spur a new phase of lockdowns and curb consumer fuel demand recovery both domestically and globally.

The major refiners indicated that the industry is wary of a rapidly spreading Omicron and the nationwide average refinery run rate would be forced to pull back below 80% from October's 85%, in the event Seoul, as well as governments across the globe impose new rounds of border closures and lockdowns.

Another wave of global lockdowns and sharp refinery throughput cuts could significantly alter OPEC+ production strategy, which would also shift South Korea and other major Asia-wide refiners' crude procurement plans, according to a trading source at S-Oil Corp.

OPEC+ is also wary of the fast-changing conditions. The producer group stood ready to reconvene "pending further developments of the pandemic, and [to] continue to monitor the market closely and make immediate adjustments if required," the group's communique stated.

South Korea's top 10 crude suppliers (Unit: '000 barrels)

*Total includes other suppliers

Source: Korea National Oil Corp.