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A decade of Asian strategy aimed at strengthening the bargaining power of the region's big oil importers is now helping Persian Gulf exporters preserve market share amid rising competition from rival international suppliers.

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Since at least the middle of the last decade, major Asian oil importers Japan and South Korea, joined more recently by India and China, have been investing heavily in oil storage facilities at key domestic and international locations, the better to leverage the burgeoning trading activities of state oil companies and domestic refiners during an era of generally high international oil prices.

At the same time, Japan and South Korea, the two countries most dependent on Middle East crude supplies with each deriving more than 83% of their total oil imports from the region in 2013, have sought to enhance their energy security by bolstering political and trade ties with Persian Gulf suppliers, especially Saudi Arabia, Kuwait and the UAE.

As part of that strategy, they forged a number of strategic oil storage deals with Arab oil exporters that were eager to cooperate.


In October 2006, amid steadily rising international oil prices, Korea National Oil Co. started the ball rolling by signing an agreement with Kuwait Petroleum Corp. to establish a 2 million-barrel joint crude oil stockpile at facilities in South Korea.

The deal gave KNOC preferential rights to purchase the crude in the event of an oil shortage while at the same time generating earnings from leasing its tanks.

Hailing the arrangement as a "triumph in the Middle East", KNOC at the time noted that Korea's total international joint stockpile had grown by 7.1 million barrels from the previous year, primarily from agreements with Kuwait and Algeria.

From Kuwait's perspective, the Korean storage deal enhanced KPC's access to emerging Asia-Pacific oil consuming markets at a time when the region's most populous nation, China, was also starting to build strategic oil stocks.

"This is a win-win situation for both countries as it gives South Korea a purchasing right while Kuwait has guaranteed sales in Northeast Asia where the demand for oil is growing," South Korea's Ministry of Commerce, Industry and Energy said in a statement.

Nonetheless, Kuwait was well ahead of its Persian Gulf neighbors, signing its storage deal as Persian Gulf oil exporters were ratcheting up official selling prices for crude shipments to Asian customers.

However, after experiencing partial blockades of oil shipments through the Strait of Hormuz choke point during two Gulf wars, Kuwait may have keenly felt the vulnerability of its position as a major shipper of waterborne crude through the Gulf with no existing or potential alternative route for oil exports.

Similar deals involving Saudi Arabia and the UAE, which already had or were developing alternative export routes, were not sealed until after the oil market crash of 2008 provided a wake-up call about the importance of bolstering bi-lateral relations with Asian oil importers.

At that time, all the Gulf's oil producers were shipping increasing crude volumes east while their exports to mature Western markets in the US and Europe were falling into decline -- a trend exacerbated by the North American shale oil production boom.

The UAE's Abu Dhabi National Oil Co. in mid-2009 signed a three-year agreement to store up to 620,000 mt (4.54 million barrels) of crude at facilities of then-Nippon Oil -- now JX Nippon Oil & Energy -- at the refiner's terminal at Kiire in southwestern Japan.

ADNOC said the deal would contribute to enhancing Abu Dhabi's relationship with Asian markets in general and Japan in particular, and would guarantee crude flows to those markets in emergency situations.

The deal was renewed for two years in 2012 and talks are under way for a further extension with an increase in leased storage capacity to 1 million mt (6.29 million barrels) from about 700,000 mt expected.

Saudi Aramco in December 2010 signed a similar deal with state-run Japan Oil, Gas and Metals National Corp., or JOGMEC, to store up to 3.8 million barrels of crude in Okinawa, southwest Japan, for three years ending December 2013.

"The goal is to have a commercially operated, administered operation that will make it more convenient for our customers in the region to utilize our supplies," Saudi Oil Minister Ali al-Naimi said when the arrangement was announced. "The supplies will primarily go to Japan, South Korea, China, and the Philippines, in that order."

That deal was also renewed, with Aramco increasing its leased storage capacity by 25% to 1 million mt in a three-year extension until December 2016.

In return for providing free storage in facilities that were being underutilized, Japan in each case received a priority claim on the stockpiles in the case of an emergency.

More Middle East oil storage deals in Asia followed, even as international crude prices rebounded and stabilized for a four-year period above $100/barrel.

In November 2012, ADNOC signed a deal with KNOC to store 6 million barrels of crude at Yeosu, South Korea, at what is currently the world's largest oil storage facility with a total capacity of 49.7 million barrels.

The UAE company sent its first 2 million-barrel shipment for joint storage the following September.

Other Persian Gulf exporters have also been eying the Yeosu storage hub and other South Korean tank farms. Iraq in 2013 signed a memorandum of understanding with South Korea on joint oil storage, with then-Iraqi Oil Minister Abdul Karim al-Luaibi telling reporters of plans to store about 4 million barrels of Iraqi crude in the Asia-Pacific country.

It remains to be seen whether the current Iraqi administration will continue the discussions under its straitened fiscal circumstances.

Whether or not those talks reach fruition, established Middle East and Asian trade partners are continuing to negotiate storage deals, despite increased flows of West African and Latin American crude to Asia in response to lower US import requirements.

India's oil minister, Dharmendra Pradhan, in August said ADNOC and KPC were in talks to store about 2 million barrels of crude in underground caverns where storage facilities are under construction.

India, which imports 79% of its oil supply, is developing a 1.33 million mt facility in Seemandhra state, due for completion by the end of this year, and a further combined 4 million mt of storage at two locations in Karnataka state, with those facilities expected to be in service by mid-2015.

Despite international sanctions against Iran, reports recently surfaced of an Iran-China oil storage deal after National Iranian Oil Co. in August told Indian customs that a cargo appearing to come from Malaysia had been loaded in China.

While various Asian oil importers have been building up domestic oil storage capacity, some have also made large investments in storage facilities at existing and emerging international storage hubs, including the port of Fujairah on the UAE's Arabian Sea coast.

Chinese state-controlled Sinopec has been particularly active in this regard, with a 16.5 million-barrel storage terminal on Indonesia's Batam island, near Singapore, due to open in 2016.

The company is also developing a Fujairah storage terminal, in a 50/50 joint venture with Singaporean partner Concord Energy, which is due for completion next year.

The UAE tank farm will have 4.2 million barrels of capacity to store crude and a further 2.6 million barrels for oil products.

Such developments at deepwater ports that can receive VLCCs are likely not only to lower transportation costs for Middle East crudes to Asian markets, but also to ease concerns about regional security and supply threats.

--Tamsin Carlisle, tamsin.carlisle@platts.com
--Edited by James Leech, james.leech@platts.com