The world’s biggest oil buyers are getting pickier about their American crude purchases. Asian refiners are discovering that the quality of cargoes varies, leading to fluctuations in the type of fuels they can produce. The shale boom and the end of a U.S. oil-export ban have proven a boon to buyers from China to India as traditional suppliers such as Saudi Arabia cut output to clear a glut. And while shipments from the Gulf Coast have soared, refiners are shifting their focus to crudes with consistent characteristics.
“The flow of U.S. oil to Asia is here to stay, but Asian importers are learning that not all grades are equally desirable,” says Tushar Tarun Bansal, a consultant from McKinsey Energy Insights. “Buyers are wary of grades such as Eagle Ford and can’t take much more of it.”
Companies typically select a mix of different crudes to process, choosing grades based on chemical characteristics that will yield higher volumes of the fuels that are most in demand. When the oil specifications are inconsistent, plants may pump out less of the products that the refiners want and more of what they don’t require at the time.
According to the refiners and two sellers of U.S. crude to Asia, the variance in characteristics is acute for grades such as Eagle Ford and Domestic Sweet Crude — an aggregate of oil from numerous streams that’s blended in tanks such as those in the storage hub of Cushing, Oklahoma.
“Unlike Middle Eastern or West African crudes, which originate from one single large and stable reservoir, shale crudes are often extracted from multiple layers and can originate from different parts of a basin which have varying geological characteristics,” said Virendra Chauhan, an analyst at industry consultant Energy Aspects Ltd.
Eagle Ford consists of a blend of oil and ultralight crude called condensate that’s pumped from thousands of wells in a formation that sprawls from Texas to Mexico. Its American Petroleum Institute gravity — a measure of density — ranges from 45 degrees to over 60 degrees. Domestic Sweet Crude, or DSW, is a composite of crude from conventional and unconventional acreage in the U.S. and Canada with an API gravity reading of 37 to 42 degrees.
In West Africa, Nigerian Qua Iboe crude is pumped from fields 20-40 miles off the country’s coast and brought to shore directly via an under-sea pipeline linked to a designated export terminal. And in the Middle East, Abu Dhabi’s Upper Zakum crude is extracted from three fields to Zirku Island for shipment abroad.
Refiners are now trying out American oil from conventional Gulf of Mexico assets, as well as shale crude pumped and transported from a specific acreage. Some buyers like Taiwan’s state-owned CPC Corp. are turning to imports of WTI Midland, a blend of shale oil from the Permian Basin that can be directly transported via the BridgeTex pipeline to Houston for export. In its most recent tender, CPC bought 4 million barrels of the grade in its single largest purchase of the variety since buying its first cargo in May. South Korea’s imports of WTI Midland in October more than doubled from a month earlier.
Asian refiners are also seeking to load smaller quantities of U.S. shale oil with more-familiar grades from Mexico in big ships to mitigate quality risks and cut freight costs. The total volume of U.S. and Mexican crude that were loaded onto a single ship for export surged more than fivefold to 11.8 million barrels through the end of November, from 2.1 million barrels in 2016, data from vessel-tracking and intelligence company Kpler show.
About 350,000 barrels per day of oil flowed from the U.S. to Asia from January to September this year, according to Chen Bo, the president of Unipec. Asia was the top destination for American crude during the period, taking 37 percent of exports, said Chen, who heads the trading arm of refiner China Petrochemical Corp., also known as Sinopec.
Sources and photo-credits: Bloomberg with assistance by Dan Murtaugh