FEATURE: Kazakh origin Urals gains popularity among Med refiners after rebranding

Kazakh-origin Urals crude has found good traction with European refiners in the Mediterranean since its rebranding as KEBCO in June, in a move designed to distinguish it from its sanctions-liable Russian counterpart, with the grade now trading at hefty premiums to Urals, according to shipping data and trade sources.

Before the invasion of Ukraine in February, there was no differentiation between Russian origin Urals, or REBCO, and Kazakh origin Urals, with all crude marketed as Urals. However, with Urals crude becoming increasingly difficult to sell in Europe amid the fallout from the invasion, Kazakhstan on June 7 announced a rebranding of the crude it exports via Russia's Transneft system as Kazakhstan Export Blend Crude Oil (KEBCO).

The rebranding has come amid a sustained impetus to sanction Russian oil exports into Europe culminating in the EU's sixth sanctions package agreed on June 3, as well as the G7 finalizing a price cap on Russian oil. Under the EU's sixth sanctions Russian seaborne crude exports to Europe will be banned from Dec. 5. However, EU rules include an exemption if a customs declaration shows oil loaded in Russia originates in a "third country".

KEBCO originates from the onshore Uzen field near the Caspian Sea and is transported via the Uzen-Atyrau-Samara pipeline, linking with the Russian Transneft system at Samara, at which point it is mingled with Russian crude. From there, the majority of the volume nominally heads south to the Black Sea port of Novorossiisk with a smaller portion going north to the Baltic port of Ust-Luga. Total volumes for KEBCO are relatively modest at around 200,000 b/d typically.

This is in contrast to Kazakhstan's flagship export crude, CPC Blend, a relatively light sweet grade loaded at Novorossiisk, which utilizes a dedicated pipeline from the Caspian Sea, with volumes approaching 1.5 million b/d. Although that volume does include some Russian crude, CPC Blend continues to trade freely as if it all originated from a third country.

For Urals however, the comingling of Russian and Kazakh crude oil in the Transneft system meant that buyers wishing to or obliged to avoid Russian crude were unable to make any distinction, as the entire Urals blend was classified as Russian.

KEBCO's rise

Kazakh origin crude typically makes up around 13% of Urals exports each month, with state-owned KazMunaiGaz allotted a proportional amount of the total Urals loading program. KEBCO is sold only by Vitol and KMG, making the market relatively small and new as a standalone marketed grade.

Loading programs for Urals have not been released since June so market participants are relying on shipping data to provide an accurate picture of KEBCO's rise in acceptance amongst Mediterranean refineries.

Data from Kpler reveals a pattern of exports, with more KEBCO going to Europe and fewer barrels heading to Asia. Over the last three months, nearly 90% of KEBCO cargoes have found homes at European refineries.

In June, 156,000 b/d of KEBCO was exported across six cargoes, with all but one cargo heading to Europe. In July, 256,000 b/d of KEBCO was exported, with all but two of the 11 cargoes going to Europe. In August, 174,000 b/d of KEBCO was exported with all seven cargoes heading to Europe.

In the three months from March to June, only around a third of KMG's equity Urals cargoes went to destinations within the EU, with the majority heading to China, India, Turkey and the UAE, effectively as Russian Urals given the lack of distinction in the market.

All nine KMG equity Urals cargoes that went to Europe in the March-May period went to Romania's Petromidia refinery, which is owned by KMG itself.

Petromidia, along with Italy's Milazzo refinery, have taken the greatest number of KEBCO cargoes in the last three months since the rebranding. However, Italy's Falconara and Spain's Petronor refineries have also taken KEBCO cargoes since June, according to Kpler data.

New Mediterranean players in the KEBCO market show the change in attitude towards the Kazakh origin Urals, after previously being shunned by European buyers.

"If you can guarantee 100% Kazakh origin... it would be easier for some of the Med refiners to approve it again," said one European trader.

Another European trader agreed that sentiment has changed towards Kazkah Urals. "It has always been approved [by the US and EU] but it was a matter of self-sanctioning and being cautious."

The trader added that, with the new differentiation in the market, a premium of more than $10/b has opened up for Kazakh origin over Russian origin Urals, which has traded at steep discounts since the war.

Platts assessed Urals CIF Rotterdam at a $20.40/b discount to Dated Brent on Sept. 1, with Urals CIF Augusta assessed at a $20.10/b discount, according to S&P Global Commodity Insights data.

However, some traders see the premium for KEBCO even greater, with cargoes heard to have traded at Dated Brent minus $4/b on a CIF Augusta basis. To put that into context, a KEBCO cargo at a $4/b discount to Dated Brent would be the same price as a Urals cargo on Feb. 22, before the invasion of Ukraine, according to S&P Global data.

Different market

The loss of Urals from European refineries' slate had previously led to a switch to sweeter grades as margins soared for distillates and gasoline cracks. However, with margins being eroded by declining product demand and exceptionally high natural gas prices, Mediterranean refiners have been seeking a cheaper baseload sour option.

"Margins are not good but OK, but they are taking KEBCO because it is still giving better returns than other sour alternatives," said a third trader.

The second trader agreed with this sentiment, saying that "falling margins have meant refineries have turned to bargains again."

Whilst KEBCO has gained popularity amongst European buyers, REBCO has seen prices fall after a previous rally in the differential.

"Urals is not trading firmer, it's a completely different market to KEBCO," said the third trader.

Former importers of Urals in Asia are now turning away from the grade as demand wanes and costly freight cuts away at arbitrage opportunities for the distressed grade.

"The arb [for Russian Urals] is definitely closed and the East market is not able to pay up" said the second trader.