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Russian East Siberia-Pacific Ocean pipeline increases competition in Asia

Middle Eastern oil producers are scrambling to protect their market share in Asia amid rising competition from a new source of supply—an oil blend from Russia called ESPO.

Russian East Siberia-Pacific Ocean pipeline increases competition in Asia

Middle Eastern oil producers are scrambling to protect their market share in Asia amid rising competition from a new source of supply—an oil blend from Russia called ESPO. Gulf states have been reviewing their export strategies and pricing policies since the launch of the blend, named for the newly inaugurated East Siberia-Pacific Ocean pipeline through which it is delivered to Asian markets, traders and analysts say. At issue is who will dominate the world's fastest-growing energy market. Oil consumption in the West is widely believed to have peaked, damped by economic recession, a shift to more-efficient vehicles and the growing use of biofuels. But demand is still growing in China. Producers are responding to that by shifting their attention away from their traditional export markets in the U.S. and Europe and towards the east.

Saudi exports to the U.S. fell to 745,000 barrels a day last August, the lowest level in almost 22 years, according to Platts, the energy information service. Meanwhile, so much Saudi crude is now flowing toward China that the country may soon replace the U.S. as the main market for Saudi Arabian crude.

Reflecting the Saudis' waning commitment to the U.S., state-owned oil giant Saudi Aramco last December gave up its lease on an oil storage facility on the Caribbean island of St. Eustatius, which fed U.S. markets. It had held it since the mid-90s.

At the same time, Saudi Aramco and Abu Dhabi have signed deals to store stockpiles of oil in Japan, making it easier for them to supply Asia.

"Producers that supply the market on long-term contracts are taking steps to counter ESPO," said Jorge Montepeque, global director of market reports at Platt's.

Iran and Iraq have also taken steps to attract Asian customers by changing the way they sell their crude, he said. Currently, both countries trade on a "Free on Board" or FOB basis, meaning the buyer covers the cost of delivery. He said they are considering switching to a CIF, or cost, insurance and freight price, where the seller pays transportation costs to the importing country as well as insurance charges. This allows them to compete better with ESPO, Mr. Montepeque said.

Saudi Arabia also surprised the market this month by unexpectedly cutting the official selling price of its Arab Light blend of crude in March to customers in Asia. Some traders said the move was a response to the challenge from ESPO.

ESPO blend was launched last December with the opening of Russia's new pipeline, a pet project of Russian prime minister Vladimir Putin. Before then, almost all of Russia's oil flowed westward.

The pipeline brings crude produced by companies like OAO Rosneft, TNK-BP Ltd. and OAO Surgutneftegaz in new oilfields in East Siberia to Skovorodino near the Chinese border, from where it is sent by rail to Kozmino, Russia's new export terminal on the Pacific Ocean. An offshoot to China will be completed this year.

ESPO's current capacity of about 600,000 barrels of oil a day will rise to 1 million barrels a day in coming years as the pipeline is extended all the way to Kozmino.

Although the quality of ESPO's crude is still largely untested, cargoes are finding plenty of willing buyers in Japan and South Korea, such as SK Energy Co., a Seoul-based refiner. Kozmino is some three to four days' sailing time from North Asian refineries, while oil from the Gulf takes three weeks.

Critically, some cargoes are also finding their way to U.S. markets. Traders say U.S. refiner Tesoro Corp. and oil giant Exxon Mobil Corp have both bought ESPO crude. Exxon declined to comment; Tesoro wasn't immediately available to comment.

The Russian government has encouraged producers to use ESPO by exempting East Siberian crude from oil export duties. That has allowed the blend to be more competitively priced than some Middle Eastern grades.

However, some Russian officials have questioned the wisdom of the tax breaks, saying they will blow a hole in Russia's fragile public finances and should be abolished.

Author: Guy Chazan

Source : Wall Street Journal


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