Page 5 - FSUOGM Week 13

FSUOGM COMMENTARY FSUOGM The ESPO pipeline
Following the expiry of OPEC+ supply quo- tas on April 1, Russian producers are now free to lift as much oil as they please. While Urals is selling at a record low, Russian producers have focused on ramping up exports of higher-value ESPO, produced in Eastern Siberia. ESPO’s pre- mium to Urals has risen to an unprecedented $11 per barrel, VTB Capital wrote in a research note on March 25.
State-owned Rosneft, the biggest operator in Eastern Siberia, is already understood to be tak- ing steps to utilise spare capacity at its fields in the region. This extra oil will be readily available to Chinese buyers, delivered via the Eastern Sibe- ria-Pacific Ocean (ESPO) system. Russian pro- ducers will be motivated to shift these supplies to make up for lacklustre demand in Europe. And they may cut into the premium to achieve this.
Refining economics
When China ramped up imports of Urals crude in early 2017, the consensus among indus- try sources was that independent refiners had expanded their feedstock diet to capitalise on arbitrage opportunities arising from the drop in Brent prices relative to Middle East crude bench- mark Dubai.
It may be that teapots are once more looking to capitalise on supplies of Russian oil that have been hit hard by the Saudi-Russia price war. Reu- ters reported on March 13 that Saudi was offer- ing its own cheap barrels to squeeze Urals out of its main markets.
China’s teapot refineries have much to gain by securing a great deal on barrels of Urals, which is similar to Oman crude in quality but is under- stood to have better refining economics.
As China returns to work, fuel demand will rise and so too will the opportunity to reduce fuel stockpiles that were built up dur- ing the nationwide COVID-19 lockdown. However, the country’s refiners will have to take a hit on the value of those stockpiles fol- lowing the recent price crash. This means that
independent refiners will be chasing the most competitive feedstocks while they rebuild their balance sheets.
The national oil companies (NOCs), mean- while, will also find the Russian blend appealing given their continued exposure to high domestic oil production.
Excess supply
Chinese President Xi Jinping ordered the coun- try’s oil and gas producers in 2018 to expand their upstream investment programmes to bol- ster domestic supply and reduce the country’s growing reliance on energy imports.
Crude production climbed to 3.98mn bpd in the first two months of this year from 3.81mn bpd in the same period of 2019, reach- ing its highest monthly level since June 2017. CNOOC Ltd announced record production figures for last year and has said that while it will slash its spending and production targets for 2020, the cuts will be made to its interna- tional operations.
The company has managed to reduce its costs by 2% year on year in 2019 to $29.78 per barrel of oil equivalent and is China’s lowest-cost oil and gas developer. Sinopec and PetroChina, on the other hand, have estimated breakeven costs of around $50-60 per barrel.
As such, Sinopec – as Asia’s largest refiner with 5.9mn bpd of refining capacity – will be looking for the cheapest oil imports to help off- set inventory losses as well as the cost of refining more expensive domestic oil. PetroChina, with 3.8mn bpd of downstream capacity, is in a sim- ilar position.
China is not interested in taking sides in the Saudi-Russian price war and will buy from the cheapest supplier as it seeks to fill its SPR and its oil companies look for bargains as they look to reduce months of built up fuel stockpiles. This means that while Urals is attractive now, Chinese buyers are more than happy to buy from other suppliers as long as the price is right.™
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Week 13 01•April•2020 w w w . N E W S B A S E . c o m
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