Russia Challenges Middle East on Oil

Russia is sending record amounts of oil to Asia, eroding the dominance of the Middle East, as refiners in South Korea and Japan increase purchases from a source that’s three weeks closer by ship.

South Korean imports of Russian crude climbed to an all- time high of 179,000 barrels a day in May, equal to 7.3 percent of the country’s supplies, according to government data. Japan took an unprecedented 241,000 barrels a day, up 61 percent from a year ago, Ministry of Economy, Trade and Industry data showed.

The first completed segment of the $26 billion East Siberian-Pacific Ocean pipeline is boosting competition between Russia and the Middle East, the world’s two biggest oil suppliers. North Asian processers can access the Russian oil, known as ESPO, for about $1 a barrel less than Dubai crude, according to shipping rates and data compiled by Bloomberg.

“More people are buying ESPO because it’s very handy and it’s very near, only two or three days,” said Osamu Fujisawa, an independent oil economist in Tokyo who formerly worked at Saudi Arabian Oil Co., or Saudi Aramco, the world’s biggest producer. “You have to consider ESPO a competitive crude to Arabian oil.”

Russia started loading tankers in December at Kozmino, the port located about 600 kilometers (373 miles) from South Korea and Japan. South Korean refiners took 39 percent of the ESPO sold through June, according to Vienna-based consultants JBC Energy GmbH. Japan bought 20 percent.

Transport Costs

Lower transport costs have boosted demand for Russian exports even as August-delivery ESPO sold at a premium of 40 cents a barrel to Persian Gulf benchmark Dubai oil on June 25, traders who participate in the market said. As recently as May 27, ESPO traded at 65 cent discount to Dubai.

Freight costs for ESPO were 70 U.S. cents a barrel as recently as July, compared with $2.16 for the Middle Eastern blend, according to data from Alliance Tankers Ltd., a Singapore-based shipbroker. Kozmino is three days by tanker from South Korea while Saudi Arabia is more than 20 days away.

Middle East producers have lowered prices to counter the competition. Abu Dhabi National Oil Co. on July 4 cut the premium on June Murban crude, the emirate’s largest export grade, over Dubai for a second month to 81 cents a barrel, the lowest level since January. Saudi Aramco reduced its August Arab Light grade to a discount of 15 cents to the average price for Oman and Dubai grades, from a premium of 50 cents for December.

Murban for September loading gained 2 cents to a discount of 11 cents a barrel to its official selling price yesterday, according to data compiled by Bloomberg.

Middle East Dominance

While ESPO exports have surged, peaking at 330,000 barrels a day in June, the Middle East remains dominant, according to David Wech, Vienna-based head of energy studies at JBC Energy.

Oman production was 853,300 barrels a day in April, according to government data. Output from the United Arab Emirates in June was 2.3 million, while Saudi Arabia pumped 8.3 million, according to a Bloomberg survey. Total Middle East output was 19.9 million barrels in June, while Russia’s output was 10.3 million barrels, according to Bloomberg data,

“ESPO is still, in terms of size, a small share” of the market, said Wech. “It was ramped up very quickly. It’s far too small to be a threat to sellers.”

ESPO contains less sulfur than Middle Eastern oils, making it less of a pollutant and more attractive to refiners. The Russian grade’s sulfur content is 0.535 percent, compared with Saudi oil’s 1.8 percent and Murban’s 0.7 percent, according to a chemical analysis of ESPO obtained by Bloomberg and data from Energy Intelligence Group.

Asian refiners are also buying the Russian oil because they have units capable of upgrading fuel oil, the residue from distilling crude, into higher-value products such as diesel and gasoline. ESPO’s fuel-oil yield is about 47 percent, according to a chemical analysis obtained by Bloomberg News, similar to that of Oman crude.

Bloomberg