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As US exports make inroads to Asia, Middle East suppliers adopt strategies to secure buyers

With so much attention on rising US oil exports and their impact on crude flows within Asia, the region’s more traditional suppliers from the Middle East are examining their own strategic approaches to maintain customers and secure outlets for their barrels.

US cargoes are showing up more regularly in Asia, where major importers are eager to diversify their supply sources—a hot topic during the recent S&P Global Platts Asia Pacific Petroleum Conference in Singapore.

Due to stability of supply and competitiveness against other grades, Middle East crudes have been East Asia’s largest supply source and many refineries in the region have been specifically configured to process Middle East sour crudes.

But the increase in spot US barrels into Asia are prompting refiners to seek lower term crude imports from the Middle East. Supplies from Latin America may also be boosted into the region, as many North Asian crude importers tend to co-load their US cargoes with central and South American grades.

US crude exports to China, South Korea, Japan

South Korea, for example, may trim its dependency on Middle East crude supplies to “70% or below” from 84.9% in the first half of 2017, supported by favorable global benchmark price trends, coupled with plentiful options for supply diversification, according to Chang Jihak, senior executive vice president at Hyundai Oilbank.

Japan’s largest refiner JXTG Nippon Oil & Energy is also looking to boost flexibility in its crude oil procurements by reducing its term commitments, Executive Vice President Takashi Hirose told Platts.

JXTG will continue to emphasize its flexibility until market conditions change, Hirose said, adding that the company’s current term crude procurement ratio stands “at around 60%” of its total imports, with the balance comprising spot and framework supplies.

As buyers seek more flexibility, producers are not standing still. They are exploring ways to ensure outlets for their demand by participating in refinery projects and diversifying means of sales.

Kuwait, for example, is expected to supply 60%-65% of the crude oil to be processed at Oman’s planned Duqm refinery, which is expected to start up between the end of 2021 and early 2022.

Buy demand by investing in refineries

The Duqm refinery, with a capacity of more than 200,000 b/d, is Kuwait’s latest foreign refinery investment. Kuwait will also supply 100% of the crude oil feedstock to the 200,000 b/d Nghi Son refinery in Vietnam, which is slated to be online by the end of March 2018. Kuwait has a major stake in both refineries.

The rise in US exports to Asia “is worrying,” Kuwait Petroleum Corp. Deputy Managing Director Waleed al-Bader said, “but we have our customers and we are approaching our customers and there is healthy demand for medium sour crudes.”

For Kuwait, investing in foreign refinery projects is not simply a reaction to recent market moves. It has led the way among Middle East producers with these plans, signing its Vietnam deal almost a decade ago in 2008, well before anyone thought US producers might start exporting crude. Its decision now looks far-sighted, with the US lifting export restrictions on its crude in December 2015.

Looking further ahead, Bakheet al-Rashidi, the CEO of Kuwait Petroleum International, has said his company will continue to look for new opportunities to invest in overseas projects, targeting, India, Indonesia and China in particular.

Similarly, Saudi Arabia is also stepping up its efforts to ensure demand in the fast growing Asian markets by taking equity stakes in greenfield refinery projects.

The latest move is that Saudi Aramco is in discussions with India about the possibility of participating in a number of refining projects operated by state-owned Indian oil companies, the first of which could start up in around 2020-21, Indian oil minister Dharmendra Pradhan told Platts on October 17.

The two projects include plans by the state-owned IOC, HPCL and BPCL to build a 60 million mt/year (over 1 million b/d) refinery in Maharashtra, along with another with a capacity of 9 million mt/year developed by HPCL in Rajasthan, Pradhan said.

This will be Saudi Aramco’s first foray into India’s refining sector, having been shopping for refining assets in Asia as it looks for captive markets for its crude oil.

Nigeria changes sales approach

Nigerian National Petroleum Corp., meanwhile, intends to handle up to 80% of the country’s crude oil lifting contracts via its trading arm in the next few years as part of efforts to widen its customer reach, Mele Kyari, general manager of state-owned NNPC’s crude oil marketing division, told Platts during the APPEC conference.

NNPC also plans to sell more crude on a CIF or delivered basis to ensure security of supply, Kyari said, as Nigeria’s oil exports had fallen significantly in the last two years due to renewed militancy in the oil-rich Niger Delta.

Nigerian crude is mostly sold and priced on an FOB basis.

NNPC will continue to depend on Asia and Europe as its two main traditional destinations and hopes to increase its share in both regions, Kyari said.

While 29% of Nigerian exports went to Asia so far this year, most went to India and Indonesia, and not other key demand hubs in China, Japan and South Korea.

“So Europe and Asia will be our prime buyers in the short term,” Kyari said.

Despite the difference in strategies taken by Kuwait and Nigeria, the producers’ need to secure demand for their crudes is a reflection of oil consumers’ approach to seek flexible supplies from a more diversified supply base.