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Russian ESPO: Impact on EOS Crude Markets
Argus ESPO Conference 2012Marina Mandarin, 10 – 11 December 2012Singapore
Dr. Tilak K. DoshiPrincipal Fellow & Head, Economics, Energy Studies Institute
Nahim Bin Zahur and Oliver YuenEnergy Analysts, Economics, Energy Studies Institute
Content
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2 Dubai: Benchmark by Default
3 ESPO as a potential benchmark
1 Nature of EOS Crude Oil Markets
4 Potential impacts of ESPO on EOS markets
3
Major Oil Flows 2011 (MMBD)Total Imports: 54.6 MMBD; Total Consumption: 88.0 MMBD
Reshaping of the oil map, with N. America displacing imports, flat OECD demand and rapid Asian demand growth
A
B
C
F
GH
I
A: ME => AP 14.5B: WAF => AP 1.8C: LA => NA 2.3D: CAN => US 2.7E: WAF => NA 1.5F: NAF => EUR 1.0G: ME => NA 2.0H: ME => EUR 2.5I: FSU => EUR 6.0J: FSU => AP 1.7K: WAF => EUR 1.2
Source: BP 2012
E
J
D
K
Russia increasingly important relative to WAF as the marginal barrel into Asia
4
0
200
400
600
800
1,000
1,200
1,400
1,600
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
MBP
D
MBP
D
Former SovietUnionMiddle East
West Africa
West Africa ‐FSU
Source: BP Statistical Review of World Energy (2003-2012)
Saudi Arabia oil exports by region (mbd)Increasing dominance of Asian markets
5
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
MBP
D
Europe
North America
Asia and Pacific
Source: OPEC Annual Statistical Bulletin (1999-2012)
Atlantic v. Far East markets: key differences
Atlantic Markets
Spot crude competes actively with terms crudes from AG
Buyers highly conscious of short term trading and business risks
Key refining regions (USGC, Rotterdam) can access multiplicity of short and long haul crudes
Supply and demand flexible and competitive among many alternative grades (“price elastic”)
Far East Markets
Far less spot traded crude competing with term contracts.
Buyers highly conscious of long term supply security risk
Region massively net crude short, with heavy dependence on Middle East crude.
Less flexible supply and demand responses, less alternative grades, fewer short haul sources (“price inelastic”)
Content
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1 Nature of EOS Crude Oil Markets
3 ESPO as a potential benchmark
2 Dubai: Benchmark by Default
4 Potential impacts of ESPO on EOS markets
Dubai – a default market crude• From peaks of over 400 mbd in early 90s, down to current estimates
of 60 – 70 mbd or about 4 – 5 cargoes per month; hardly any spot traded
• Several attempts to handle Dubai illiquidity: – Oman deliverable into Dubai contract (2001), – introduction of “partials” trade (2004), – Upper Zakum deliverable into Dubai contract (2006),– reports of Qatar Marine and Basrah Light as potential deliverable
streams into Dubai contract (2012)• Platts partials contracts are illiquid and have few players since 2008• Price discovery based on spot physical transactions no longer
feasible• Yet Oman-Dubai MOPS assessment still the pricing basis for bulk of
ME crudes
• Dubai is a relative price market, set by liquidity in Dubai inter-month swap spreads and Brent-Dubai EFS spreads– Inter-month swaps allow hedges from month to month– EFS allows transfer of risk from a sparsely traded
crude to the Brent complex with deep pools of liquidity• Derivative swap market sets physical transaction
prices• But this is not unique to Dubai: Platts Dated Brent
quote uses CFDs to fix price relative to Brent Forward cash contract
Dubai illiquidity does not matter!
Dubai – a deficientFar East Marker
Asian “dependency” on AG crude imports
End user and destination restrictions
Dubai a function of swaps-based price discovery but no reason why this would cause a premium.
Works both ways: export dependency of Middle East
Such restrictions necessary for market price discovery via marker crudes
Key assertions on why there is a premium
Counters
Dubai Debates: the “Asia Premium”
Marker Crudes & Network Economics
• Network Economics: when the value of a good or service increases when others buy the same good or service
• “Oman-Dubai” MOPS is the network product, until “others” stop using it
• Inertia or “chicken-and-egg” problem – not until a major stakeholder has reason to forego
benefits of networked product– tipping points when existing product gets too
dysfunctional (ANS to WTI; WTI to ASCI)
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Content
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2 Dubai: Benchmark by Default
1 Nature of EOS Crude Oil Markets
3 ESPO as a potential benchmark
4 Potential impacts of ESPO on EOS markets
Flow of ESPO
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300,000 b/d
Current delivery by rail.Pipeline to be completed in 2014.
300,000 b/d
Export to EOS Markets
Source: Platts (2011), ERINA
• Competes with Middle East Oil• ESPO oil will play an increasing role in Asia
ESPO Oil Flow
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-0.4
0.1
0.6
1.1
1.6
2010 2012 Later date
MM
BPD
Capacity of ESPO Pipeline
Source: Platts (2011)
ESPO export volumes
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0
100
200
300
400
500
600
700
800
Expo
rt volum
es (M
BPD)
Exports to China via Daqing Exports from Kozmino
Source: Platts (2011), Argus
ESPO export volumes (2)
• First ESPO exports from Kozmino in December 2009
• Average monthly loading volumes increased in early 2010, stabilizing at 1.4 million mt (340,000 b/d) from April 2010 onwards
• Pipeline exports directly to China officially began in January 2011, increasing monthly total export volumes to 2.5 million mt (600,000 b/d)
• ESPO: ~300,000 b/d at Kozmino, projected to increase to 600,000 b/d by 2013 and 1,000,000 b/d by 2016
• ESPO buyers include 14 countries, including Japan (21%), China (21%), US (13%) and other Asia-Pacific countries
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ESPO Oil Flow
• Demand: East of Suez
• Supply: East Siberia– Thru ESPO pipeline and
Russian port of Kozminoon the Pacific coast
– 84% of ESPO crude exported to Asia
Source: Platts, February 2011
ESPO as a regional benchmark?
• Platts: “Due to its location, ample production levels and wide equity ownership, ESPO crude stream has attributes that could, over time, lead it to become a major flat price indicator of spot oil volumes in Asia”
• IEA: ESPO may become a regional oil benchmark
• For instance, Platts ESPO FOB Kozmino used for Rosneft term deliveries to China
• Barriers to emergence of ESPO as a benchmark– ESPO continues to be priced off Dubai or Oman, though premium has been
increasing– Most volumes sold on long-term basis rather than in spot market– “Strong concern amongst many companies that an ESPO benchmark could fall
victim to political persuasions”
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ESPO as a global benchmark?
• Question marks over reliability of Brent and WTI, which may not be fully reflective of global supply and demand fundamentals
• ESPO blend and DME Oman have emerged as potential future benchmarks
• Pre-requisites for benchmark– Physical volumes of at least 500,000 b/d (ESPO exports still at 300,000
b/d in 2012 and projected to rise to 400,000 b/d in 2013)– Financial liquidity, which depends on trading volumes (e.g. large
volumes of trading in Brent futures and contracts) and access to financing
• Financial liquidity determines level of investment, but liquidity itself is driven by increased investment: chicken-and-egg problem
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Basic features of a benchmark crude
ASCI WTI BFOE Dubai Oman ESPO
Production (MBPD) 735 300-400 1,220 70-80 710 610
Volume Spot Traded (MBPD) 580 940 635 85 245 230
Number of Spot Trades per Cal Month 260 330 100 <5 10 ?
Number of Spot Trades Per Day 13 16 5 <1 <1 ?
Number of Different Spot Buyers per Cal Month 26 27 10 3 5 ?
Number of Different Spot Sellers per Cal Month 24 36 9 3 6 ?
Largest 3 Buyers % of Total Spot Volume 43% 38% 72% 100% 50% ?
Largest 3 Sellers % of Total Spot Volume 38% 51% 56% 100% 80% ?
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Source: Fattouh(2011); Argus (2012)
Characteristics of a benchmark crude
ASCI WTI BFOE Dubai Oman ESPO
Freely tradable (no restrictions on re-sale)
x ?
Adequate tradable physical base
x
No dominant buyer/seller ? x ? ?
Adequate loading facilities, known loading schedules
Capable of being loadedonto VLCCs
N/A
Tax certainty, absence of official constraint on trading prices
? ? ?
Stable regulatory regime and lack of regulatory risk
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Source: Horsnell(1997); Fattouh(2011); Argus (2012)
Characteristics of a benchmark crude (2)
ASCI WTI BFOE Dubai Oman ESPO
Political stability, including low embargo risk
?
Crude should be deliverable in water-borne cargoes
x ?
No special characteristics that limit refineries able to process the crude
No significant non-refininguses
(?)
No perception that market could be influenced by political control
x x x
Price behavior should be proxy for marginal conditions
? x ? ? ? ?
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Source: Horsnell(1997); Fattouh(2011); Argus (2012)
Characteristics of a benchmark crude
• Freely tradable (no restrictions on re-sale)• Adequate tradeable physical base• No dominant buyer or seller• Adequate and known loading schedules• Capable of being loaded onto VLCCs (very large crude carriers)• Tax certainty and absence of official constraint on trading prices• Stable regulatory regime and lack of regulatory risk
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Characteristics of a benchmark crude (2)
• Political stability, including low risk of being embargoed– No perception that the market could be influenced by political
control
• Crude should be deliverable in water-borne cargoes– Pipeline crudes may be less fungible
• No special characteristics that reduce the number of refineries able to run it
• Should not have significant non-refining uses (e.g. direct burn for power)
• Price behavior should be proxy for marginal conditions
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Content
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2 Dubai: Benchmark by Default
3 ESPO as a potential benchmark
4 Potential impacts of ESPO on EOS markets
1 Nature of EOS Crude Oil Markets
Quality specifications of major crudes
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CossackGippsland
Bonny Light
Shengli
Arduna
Attaka
Duri
Widuri
Minas
DaqingMiri
Tapis
Bach Ho
ESPO
Brent
Forties
Dubai
Oman
WTIMurban Lower Zakum
Urals
Sokol
Handil Vityaz
Forcados
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25
30
35
40
45
50
0 0.5 1 1.5 2
Gravity, A
PI
Sulphur, %
Arab Light
Quality specifications of major crudes (2)
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• Asia-Pacific crudes – Sweeter (sulphur < 0.15) compared to other crudes– Generally in light to medium range
• Traditional benchmarks were Tapis (light), Minas (medium) and Duri (heavy)
• Current major benchmark is Dated Brent (light, less sweet than most Asia-Pacific crudes)– Other grades of similar quality include ESPO and Murban:
potential competitors as benchmarks for sweet crude?– WTI also in the sweet, light range: possible impact in the future if
shale oil flows begin?
Comparison of product yields
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Sources: Argus (2012), Platts (2011); BP (2012); Energy Intelligence Research (2006)
0
10
20
30
40
50
60
70
80
90
100
ESPO Brent Bland Arab Light Murban
% of volum
e
ResidueMiddle DistillatesLight distillates
Pricing
• Argus: ESPO Blend assessed as a differential to Dubai swaps, with trading beginning 30-75 days before cargo loading
• Platts: ESPO Crude assessed as a differential to Platts Dubai
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Evolution of ESPO prices
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Platts ESPO-Dubai differential
Source: Platts (2011)
• Traded at a discount to Dubai crude in 1st half of 2010
– Quality uncertain– Perceived as inferior to Dubai
• From August 2010-January 2011, a steadily increasing premium relative to Dubai, reaching a peak of $3.62/barrel
– Sweeter and lighter crude than Dubai
– ESPO crude widely accepted by regional refiners due to proximity of Kozmino to key demand centers
– Widening Brent/Dubai spread has encouraged purchase of crudes priced against Dubai
• ESPO beginning to compete wirh Middle Eastern premium grades (e.g. Murban)
ESPO-Dubai and ESPO-Brent
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‐4.000
‐3.000
‐2.000
‐1.000
0.000
1.000
2.000
3.000
4.000
5.000
6.000De
c 2009
Jan 2010
Feb 2010
Mar 2010
Apr 2
010
May 2010
Jun 2010
Jul 2010
Aug 2010
Sep 2010
Oct 2010
Nov 2010
Dec 2010
Jan 2011
Feb 2011
Mar 2011
Apr 2
011
May 2011
Jun 2011
Jul 2011
Aug 2011
Sep 2011
Oct 2011
Nov 2011
Dec 2011
Jan 2012
Feb 2012
Mar 2012
Apr 2
012
May 2012
Jun 2012
Jul 2012
Aug 2012
Sep 2012
Oct 2012
Nov 2012
USD
/Barrel (FO
B)
ESPO‐Dubai price differential ESPO‐Brent price differentialSource: Argus (2012)
ESPO and Arab Light relative to Dubai
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‐2
‐1
0
1
2
3
4
5
6
Feb 20
09
Apr 2
009
Jun 20
09
Aug 20
09
Oct 200
9
Dec 20
09
Feb 20
10
Apr 2
010
Jun 20
10
Aug 20
10
Oct 201
0
Dec 20
10
Feb 20
11
Apr 2
011
Jun 20
11
Aug 20
11
Oct 201
1
Dec 20
11
Feb 20
12
Apr 2
012
Jun 20
12
Aug 20
12
Oct 201
2
US$/bbl
ESPO‐Dubai Arab Light‐Dubai
Source: Argus (2012)
ESPO and Arab Light relative to North Sea Dated
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‐8
‐6
‐4
‐2
0
2
4
6
Feb 20
09Ap
r 200
9Jun 20
09Au
g 20
09Oct 200
9De
c 20
09Feb 20
10Ap
r 201
0Jun 20
10Au
g 20
10Oct 201
0De
c 20
10Feb 20
11Ap
r 201
1Jun 20
11Au
g 20
11Oct 201
1De
c 20
11Feb 20
12Ap
r 201
2Jun 20
12Au
g 20
12Oct 201
2
US$/bbl
ESPO‐North Sea Dated Arab Light‐North Sea Dated
Source: Argus (2012)
ESPO-Arab Light differentials
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‐3.000
‐2.000
‐1.000
0.000
1.000
2.000
3.000
4.000
US$/bbl
ESPO‐Arab Light
Source: Argus (2012)
ESPO and Arab Light compared
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• ESPO (0.54% sulphur) significantly sweeter than Arab Light (1.78% sulphur), but of similar API gravity
• Since the initial few months, ESPO has generally traded at a $1-3 premium to Arab Light until the recent drop in prices
• Both ESPO-Dubai and Arab Light-Dubai differentials rose in 1st half of 2011 when Brent-Dubai gap widened
• During same period, ESPO and Arab Light began trading at discount to North Sea Dated
• Since start of 2012, differentials to Dubai and to Brent have been more closely aligned for both ESPO and Arab Light
ESPO-Murban and ESPO-Bonny Light differentials
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‐8.00
‐6.00
‐4.00
‐2.00
0.00
2.00
4.00
6.00
8.00
Dec 20
09Jan 20
10Feb 20
10Mar 2010
Apr 2
010
May 201
0Jun 20
10Jul 201
0Au
g 20
10Sep 20
10Oct 201
0Nov 2010
Dec 20
10Jan 20
11Feb 20
11Mar 2011
Apr 2
011
May 201
1Jun 20
11Jul 201
1Au
g 20
11Sep 20
11Oct 201
1Nov 2011
Dec 20
11Jan 20
12Feb 20
12Mar 2012
Apr 2
012
May 201
2Jun 20
12Jul 201
2Au
g 20
12Sep 20
12Oct 201
2Nov 2012
US$/bbl
ESPO‐Murban ESPO‐Bonny Light ESPO‐Dubai
Source: Argus (2012)
ESPO-Murban and ESPO-Bonny Light differentials (2)
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• ESPO close in quality to Murban and Bonny Light– Heavier and sweeter than Murban– Slightly lighter and sourer than Bonny Light
• ESPO traded at a $2-3 discount to both crudes until mid-2010• ESPO-Murban differential has remained between -$2 and $2 since
mid-2010, largely tracking the ESPO-Dubai differential• ESPO traded at a significant discount of $2-6 against Bonny Light until
Oct 2011, but since then differential has been between -$3 and $2• Depending on comparative refinery gate values, ESPO could compete
with Murban and Bonny Light, especially given ESPO’s freight cost advantage in NE Asia
ESPO Murban Bonny LightSulphur content 0.54% 0.8% 0.16%API gravity 34.7 40 32.9
Effect on competition in EOS crude market
• Saudi Arabia and Russia have been competing with each other for increased market share in Asia Pacific since ESPO exports began.
• One aspect of Saudi response: export crude to the US via East Asia given that the US has also become the top importer of Russia's ESPO Blend crude.
• Traders in 2010 expected Saudi Arabia to lower the prices of all its crude grades heading to Asia for August
– Partly due to slow demand from regional refiners– Intensifying competition from Russia's ESPO crude
• Collusion possibly less likely than competition, with little prospect of Russia joining OPEC
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Other issues
• Diversification benefits of ESPO imports?– "Too much dependence on the Strait of Malacca exposes Japan to significant
risk of supply disruption,” Kaieda (Japan’s Minister of Economy, Trade, and Industry) said. "The route from Russia is important for delivery of natural gas and oil.“ (January 2011)
• Russian tax policy and its implications– Initial exemption from export duty for ESPO exports– Since July 2010, an export duty of $9.50/b ($69.90/mt), revised on a monthly
basis ($18.72/b in February 2011, which is 40% of Urals duty)– In addition, a “through transportation fee” for crude deliveries via the pipeline
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