The US faces an awkward rival as it makes its first attempt in 40 years to export crude oil: Iran.
Iran, whose economy has been throttled by Western sanctions against its nuclear program that have halved the country’s crude shipments, is now selling higher quality and cheaper oil to China that leaves little room for US crude to enter the market in the world’s top energy consumer.
While buyers in Japan and South Korea have been willing to trial a US-grade of the super-light crude known as condensate, China has already locked in annual contracts with Tehran and is not expected to take any US oil in the short term.
With US producers looking to open a trade route to sell surplus condensate from the US shale boom, worries about quality and legal issues have added to doubts about how much of the oil the rest of Asia can take.
“China gets condensate from Iran, which is much cheaper than that from the US,” a Singapore-based trader with a European trading company said. “They might get involved at a later stage, but they will not be at the forefront.”
Condensate that has been minimally processed won export approval from US officials last month, softening a decades-old ban on selling US crude abroad.
The light oil can be cracked in a processing plant called a splitter to make petroleum products and petrochemicals, or blended with heavier crude for use in refineries.
South Korea and Japan have purchased the first condensate from the US, with Mitsui & Co buying a cargo from Enterprise Product Partners for loading this month that it then sold to South Korean refiner GS Caltex, sources said.
Refiner Cosmo Oil Co has also bought a cargo of US condensate that it is to load late next month for arrival at the Yokkaichi refinery in Japan in October, a source said.
Japan and South Korea, which together account for just more than half of Asia’s 1.1 million barrels per day (bpd) condensate splitter capacity, are seen as more open to trying the US as an alternative supplier.
Enterprise has also signed a short-term contract with another Japanese trader, Mitsubishi Corp, with a first loading likely in September.
Asian buyers have been waiting to see if the US oil is suitable and if exporters can price it competitively given it has to be shipped a further distance than competing grades from leading regular suppliers Qatar and Australia.
“They are testing the waters, so we’re not expecting huge volumes this year,” said Richard Gorry, managing director of energy consultancy JBC Asia.
Showing the competition US exports face, Iran exports about 55 percent of its approximately 250,000 bpd of South Pars condensate output to two Chinese buyers at deep discounts under annual contracts.
Since US and EU sanctions on the Islamic Republic were eased late last year in exchange for Iran curbing nuclear activities, Tehran’s exports have risen about 30 percent to between 1.25 million and 1.3 million bpd, much of this as South Pars shipments to China.
Some of the Iranian condensate could be sold as low as US$5 a barrel below Dubai quotes, or about US$8 a barrel cheaper than Qatari grades.
US condensate would likely have to be priced lower than the similar Qatari grades to attract buyers, traders said.
Qatar is the biggest supplier of condensate to Asia at about 450,000 bpd, followed by Iran. Australia and East Timor together produce nearly 170,000 bpd, with most of the output heading to Asian markets, according to trade sources.
Higher shipping costs compared with the short distance from the Middle East will deter India from buying US condensate, according to sources at Indian refiners.
Another issue is uncertainty over the future of US regulations on condensate exports.
Two US senators have questioned the US Department of Commerce’s approval, saying exports may violate a ban in place since the Arab oil embargo of the 1970s. Refined products, such as gasoline and diesel, are not restricted.
“What happens if some ruling appears and penalizes the buyers?” a trader at a North Asian refiner asked. “Also, there’s not much economics in it so why take the risk?”
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