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Analysis: South Korea to extend sweet crude shopping spree in Kazakhstan ahead of IMO 2020

Highlights

South Korean refiners are keen to buy more light sweet CPC Blend crude

Sweet crude prices are rising, but Middle East OSPs are also seen expensive

SK, Hyundai are also well-equipped to process heavier, sour grades

Singapore — South Korean refiners will likely extend their low sulfur crude buying spree in Kazakhstan, despite the recent surge in sweet crude benchmark Brent's premium to Dubai prices, to ensure their sweet crude supply is adequate in the leadup to tighter international marine fuel sulfur limits that kick in next January 1.

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Global sweet crude premiums have been trending higher ahead of the stricter marine fuel standards being imposed by the International Maritime Organization in 2020 that will require increased consumption of lower sulfur refinery feedstocks.

The Brent/Dubai Exchange of Futures for Swaps -- a key indicator of Brent's premium to the Middle Eastern benchmark that often serves as a barometer of general strength in the international sweet crude complex -- rallied to $4.52/b last Thursday, the highest since hitting $4.68/b on April 2018, S&P Global Platts data showed.

The EFS has averaged $2.66/b to date in the second quarter, jumping from 77 cents/b in Q1 and $1.86/b in Q4 2018.

A stronger EFS makes various sweet crude grades produced in Southeast and Central Asia, Africa, the Mediterranean and the North Sea that are linked to the European benchmark Brent less economical than Dubai-linked high sulfur Persian Gulf grades.

However, Brent's lofty premium to Dubai is unlikely to curb South Korea's appetite for Kazakhstan's flagship CPC Blend crude -- and the country's major refiners SK Innovation, Hyundai Oilbank and GS Caltex remain keen to procure the light sweet grade heading into 2020, refinery officials told Platts this week.

CPC Blend is a light grade produced in western Kazakhstan with a specific gravity of around 44-45 API and a sulfur content of 0.5%-0.6%.

"We are seeking to secure light sweet feedstock oil as IMO sulfur regulations are set to come into force from 2020; we can increase [sweet crude] spot purchases," one refinery official said.

"Prices of light sweet grades can climb because of the pending IMO rules, but Middle Eastern producers have also sharply raised their official selling prices recently, keeping several specific light sweet grades attractive. We will keep purchasing various grades on the basis of economics," another refinery official said.

South Korea imported 17.86 million barrels of crude from Kazakhstan over January-April, up 39% from 12.82 million barrels in the same period a year earlier, latest data from state-run Korea National Oil Corp. showed.

Hyundai Oilbank imported on average 1 million barrels/month of CPC Blend crude in 2018 and has doubled this to 2 million barrels/month since February this year. SK Innovation has been importing 2 million-3 million barrels/month of Kazakhstan's CPC Blend to date this year, while GS Caltex has been buying 1 million barrels/month.

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FLEXIBILITY

Any sharp volatility in sweet crude benchmarks Brent and WTI prices would not necessarily raise alarm bells among South Korean refiners, as the companies are also well equipped to process sour and heavy crudes into low sulfur clean fuels.

South Korea has been relying heavily on Kazakhstan and the US for light sweet crude supply over the past couple of years, even though its refiners can easily switch their crude slates to run mostly sour oil whenever necessary, the officials said.

South Korean refiners have been investing heavily in new heavy oil upgraders and desulfurization units, they said.

Hyundai Oilbank started commercial production in September last year at a new 80,000 b/d solvent deasphalting unit that separates alsphalt from heavy crude or bitumen and upgrades non-volatile residues to make middle distillate products and gasoline. It is also expanding the capacity of its heavy oil upgraders to 211,000 b/d from the current 164,500 b/d.

SK Innovation since 2017 has been building a vacuum residue desulfurization unit, or VRDS, with a 40,000 b/d capacity at its Ulsan complex.

"We aim to complete construction of the VRDS in February next year and start commercial production [from] the VRDS unit as early as possible to meet [domestic and international marine fuels] demand under the IMO rules," a company official said earlier.

The VRDS will transform heavy fuel oil into value-added low sulfur fuel oil and middle distillate oil products, producing 34,000 b/d of 0.5% sulfur fuel oil and 6,000 b/d of gasoil, and increase the company's heavy oil upgrader capacity to 239,000 b/d from 199,000 b/d currently.

-- Gawoon Philip Vahn, newsdesk@spglobal.com

--Charles Lee, newsdesk@spglobal.com

--Avantika Ramesh, newsdesk@spglobal.com

-- Edited by Wendy Wells, newsdesk@spglobal.com