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South Korean refiner SK Innovation makes first purchase of US crude

Ulsan, South Korea — South Korea's largest refiner, SK Innovation, has made its first purchase of US crude oil other than condensate as part of its efforts to diversify crude sources against the backdrop of a squeeze in supply of Middle Eastern heavy grades.

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The refiner has also increased intakes of Kazakhstan's naphtha-rich CPC crude due to lower differentials driven by a flood of light, low-sulfur crude.

"We have purchased 1 million barrels of West Texas grade," SK Innovation spokeswoman Kim Woo-Kyung said Tuesday.

The cargo will be co-loaded with 1 million barrels of Mexican Isthmus late this month before arriving at SK Innovation's refining complex in Ulsan on the country's southeast coast in mid-October. The VLCC with 2 million barrels will not pass through the Panama Canal but go via the Atlantic Ocean.

It marks SK Innovation's first purchase of US crude other than condensate, Kim said. SK Innovation, which runs a condensate splitter with a capacity of 100,000 b/d bought 400,000 barrels of condensate in 2014 and 934,000 barrels of condensate in 2015, from the US.

Front-month WTI discount to DubaiThe narrowing of the spreads between low sulfur crude in the West and high sulfur crude in the East, following the implementation of OPEC-led output cuts from January, has enabled crude grades in the US to find non-traditional homes in Asia.

The spread between front-month Dubai crude swap against same-month WTI swap first flipped into positive territory on January 4, when it was assessed at 4 cents/b. The last time the spread was in positive territory was on October 28, 2015 when it was assessed at 48 cents/b, S&P Global Platts data shows.

The front-month Middle East crude benchmark swap has commanded a premium to its US counterpart for most of this year, with the spread averaging $1.18/b so far in the third quarter, $1.29/b in Q2 and $0.51/b in Q1, against an average discount of $1.62/b in Q4 2016, according to the data.

Lower WTI versus Dubai crude typically makes various North, Central and South American crude grades priced against WTI more competitive.


"We have heavy oil upgraders, but this does not necessarily mean our margins would be eroded by increased imports of light crude. Light grades have become more attractive in terms of price and yields, and so we have increased purchases of Kazakhstan's CPC and Forties," an official at SK Trading International said.

The refiner has been receiving 4 million barrels of light CPC Blend for four months in a row by taking 1 million barrels a month from June to September.

An increasing sweet supply balance in the Mediterranean, driven by rising output from Libya and also some US crude finding its way into the region, has put pressure on the CPC crude.

It is unusual for a South Korean refiner to import Kazakh crude because of the long voyage and the size of the tankers. SK Innovation bought just 1 million barrels of Kazakh crude in the whole of 2016.

South Korean refiners including SK Innovation imported 6.25 million barrels of Kazakh crude in the first half of this year, almost six times the 1.06 million imported a year earlier, according to data from state-run Korea National Oil Corp.

CPC Blend is piped to the Russian Black Sea port of Novorossiisk from where it is transported on tankers via the Mediterranean and takes more than a month to reach South Korea.

It is loaded on Suezmax (maximum load 140,000 mt) or smaller vessels because VLCCs, which can carry a full cargo of 280,000 mt, or 2 million barrels, are unable to pass through the Suez Canal.

But lower prices have incentivised South Korean refiners to take CPC crude.

The Mediterranean basin is glutted with light sweet grades, which typically trade at premiums to heavier sour grades but are now at widening discounts.

South Korea's top 10 crude oil suppliers


"Our refining facilities with advanced heavy oil upgraders allow us to procure any crude grades in line with maximizing our margins," said Eom Ju-Pil, a manager in the Petroleum Quality Management Team at SK Innovation's Ulsan complex.

"Medium, heavy crude grades from the Middle East yield more residual fuel oil which needs further and more costly upgrading into light transportation fuels, while light, sweet crude makes it easy to extract more diesel and gasoline that command a higher margin," he said.

"We are taking various types of crude, on average 50 different grades a year, and usually blend 12-15 different grades for processing in crude distillation units to optimize our refinery production," Eom said.

SK Innovation's Ulsan complex operates five CDUs with a combined capacity of 840,000 b/d. The complex also has three upgraders -- two residue fluid catalytic cracking units with a capacity 64,000 b/d and 90,000 b/d, respectively, which are more focused on gasoline production, and a 45,000 b/d heavy oil upgrader which is more focused on diesel production.

SK Innovation runs another complex in Incheon on the west coast which has two CDUs with combined capacity of 275,000 b/d and a 100,000 b/d condensate splitter.

--Charles Lee,
--Edited by Jonathan Dart,