Gulf oil producers face a major new challenger in their Far East markets. A new pipeline that can move Siberian crude to an isolated port on the Sea of Japan opens up the region, including Japan and South Korea, to new supplies, putting pressure on prices.
Russia threatens 'Asian premium'
From an isolated port on its east coast near Vladivostok, Russia has quietly launched its invasion of the East Asian oil market that will challenge the dominance of Gulf exporters.
With the completion of a new pipeline system in December, Russia can now move significant volumes of crude oil from Siberia to its east coast. Before the inauguration of the Eastern Siberia Pacific Ocean (ESPO) pipeline, nearly all Russian oil was shipped westward with a single major buyer: Europe. The new flow is a coup for Asian buyers, who can shop around for supplies, and a threat to market share and premium prices charged by the Gulf Arab states and Iran, the top exporters.
The US$12 billion (Dh44.07bn) investment in infrastructure has allowed Russia to start exporting up to 300,000 barrels per day (bpd) from Kozmino, the east coast port, and pipe another 300,000 bpd directly into Chinese Manchuria by the end of this year. When a second, $10bn pipeline is completed in four years, it will double its capacity at the port, giving it the option to flood the Asian market with close to 1 million bpd of oil.
Crude may be freely traded on the global market, but for decades East Asia's geographic position has left it heavily reliant on Middle Eastern exporters, who were able to command an "Asian premium" to international prices. While the premium varies based on market conditions, it has been as much as $6 a barrel. The Russian crude will cut the premium and shake up the sellers in the Asian market, says Chang Jihak, the senior vice president for crude oil and trading at Hyundai Oil Bank, South Korea's fourth-largest refiner.
"Overall, this situation is good news for Far Eastern refineries," he says. "It can reduce the Asian premium, and we can get various sources for Korea. "At the same time it will be a challenge to the Middle Eastern countries, and the competition will start getting harder." Price discrepancies of only a few dollars per barrel make a huge difference for refiners, which generate revenues on the tight margin between the cost of crude and the prices they can charge for refined fuels such as petrol and diesel.
Gulf exporters have been readying themselves for ESPO for some time. Delegations of energy officials from Saudi Arabia, Iran and the UAE visited Japan, China and South Korea last year, and oil producers are moving to acquire storage facilities and refineries that can function as guaranteed markets for their oil. "ESPO crude is inevitably going to establish a market share for Russia in Asia by taking someone else's market share," said Andrew Neff, a Russian energy expert at IHS Global Insight, a consultancy. "Increasing oil storage capacity in the Far East is one way for Gulf exporters to boost competitiveness since it reduces transport time and makes these more quickly 'deliverable' - more in line with ESPO crude sold from Kozmino terminal."
Abu Dhabi, which counts Japan and South Korea as its two biggest markets, has sought for a decade to lock down market share in each country. International Petroleum Investment Corporation (IPIC), chaired by Sheikh Mansour bin Zayed, the Deputy Prime Minister and Minister of Presidential Affairs, bought a 50 per cent stake in Hyundai Oil Bank in 1999 and increased its share to 70 per cent in 2003.
In 2007, it took a 20.8 per cent share in Cosmo Oil of Japan, the country's fourth-largest oil company. The two acquisitions have secured markets: Hyundai Oil imports 70,000 bpd from Abu Dhabi on contract in addition to spot purchases, and as of 2007, Cosmo bought 25 per cent of its crude, or more than 150,000 bpd if it were operating at full capacity, from Abu Dhabi. In total, the Abu Dhabi National Oil Company (ADNOC) sells more than 1 million bpd to Japan and more than 230,000 to Korea, plus large purchases on the spot market.
Mr Chang says he hopes the new competition from Russia will encourage Abu Dhabi to sell even more volumes to Asian firms in which it owns equity stakes. "With such big changes in the Far East market, with Russian crude and new completion, we want to co-operate and co-ordinate on behalf of Abu Dhabi," he says. "As a refiner, the fact that our major shareholder is a big crude producer is quite helpful for my business."
ADNOC has also moved to acquire Asian storage facilities, with an agreement last year to lease space in Japan from Nippon Oil capable of holding 3.9 million barrels. ADNOC marketing officials could not be reached for comment. Other Gulf states have adopted similar strategies. Saudi Aramco last year completed an oil refinery in China and said it was in talks with Japanese officials to store more crude in the country.
The company also owns stakes in refineries in Japan and South Korea. Kuwait last year signed an agreement with Sinopec, the Chinese oil company, to build a refinery in Guangdong province in the south of the country. So far, this battle has barely begun, since ESPO crude entered the global market at a time when slower economic growth had already reduced oil consumption in East Asia and shrunk the Asian premium. The impact of Russia's strategic shift will really only be felt if it completes the second stage pipeline to ramp up capacity and makes oil discoveries in Eastern Siberia, Mr Neff says.
The long-term plan is for Russia to expand its export capacity to 1.6 million bpd. At that point, the fight for East Asia's lucrative markets is likely to start in earnest. @Email:email@example.com