Shale Boom Redraws Oil Routes
As Alaskans Ship To South Korea
Oct 31, 2014
By Heesu Lee
For signs of how the U.S. shale boom is transforming the global flow of oil, look halfway across the world at South Korea.
The Asian nation, which relies on the Middle East for about 86% of its oil imports, is benefiting as new output from Texas
to North Dakota displaces the crudes that fed U.S. refineries for decades. South Korea received this month a shipment of
Alaskan oil for the first time in at least eight years and may buy more, the importing company said. The country was the
first to receive a cargo of the ultralight U.S. oil known as condensate after export rules were eased.
The U.S. shale revolution has driven oil output to the highest in more three
decades, reducing America’s need for overseas purchases and sinking global
prices into a bear market. South Korea is seeking to reduce its dependence
on Middle East crude just as OPEC’s biggest members discount supplies to
protect market share and appear to be losing influence.
“The import burden for the U.S. has come down over the last few years,”
says Virendra Chauhan, a London-based analyst at Energy Aspects Ltd. “A lot
more crudes have become available to flow east into countries such as
Korea.”
South Korea, which imports 97% of its energy needs, receives one third of its
oil from Saudi Arabia, the world’s biggest crude exporter and largest
member in the Organization of Petroleum Exporting Countries.
MIDEAST SUPPLIES
Its purchases from other OPEC members are declining. Crude imports from Iran fell to 4 million barrels last month, 27%
below the five-year average, according to data from Korea National Oil Corp. Libyan supplies declined 55% last month
from August, while shipments from Iraq dropped by 16%. “The need for diversifying supplies grew more than ever as
the Middle East turned into a region full of instabilities,” says Oh Sae Sin, of the Korea Energy Economics Institute.
“South Korea is laying groundwork for a relationship with the U.S.”
POLITICAL UNREST
The Middle East and North Africa, home to eight OPEC members, have been rife with political instability and potential
threats to oil supplies since 2011. Libyan leader Muammar Qaddafi was ousted and an uprising against Syrian leader
Bashar al-Assad began in that year. In 2014, Islamic State militants routed the Iraqi army in the north, raising concern
they were a danger to oil fields in the country’s south.
The U.S. imported 7.6 million barrels a day in July, 9.7% below the five-year average. Forecasts are that the US will
export more energy than it imports by 2025.
As shipments from traditional suppliers shrink, crudes from the Americas and Africa are making their way to South
Korea. Bogota, Colombia-based Ecopetrol SA sold its first cargo of Castilla Blend crude to South Korea this month, and
the country’s refiners this year imported the first Ecuadorean oil since 2010.
TAX REBATE
Starting next year South Korean refiners can
receive a tax rebate of as much as 16 won (2
cents) per liter (0.26 gallon) of refined fuel sold
domestically derived from non-Middle East
crude, according to the Petroleum and
Petroleum-Alternative Business Act signed into
law in September by President Park Geun Hye.
South Korea is one of the world's wealthiest nations
ranking 15th by GDP. It is a developed country with
high-income but almost no natural resources and a
small territory. South Korea’s export-oriented
economic strategy made it 7th largest exporter and
7th largest importer in the world in 2012,
“South Korean refiners are testing different crudes to cut their expenses as their profits are suffering,” says Lee Chung
Jae, an analyst at KTB Securities Co. in Seoul. “Refiners will need to figure out if the subsidies they get will take away the
additional costs they needed to pay to get crude from outside the Middle East.”
The U.S. Commerce Department in June opened the door to more U.S. oil exports as long as the crude is lightly
processed, tempering the impact of a law that’s banned most overseas petroleum shipments for the last four decades.
Condensates are abundant in shale formations during the drilling boom, leading to oversupply on the U.S. Gulf Coast.
SK Innovation Co., South Korea’s largest refiner, bought
400,000 barrels of the U.S. condensate for delivery next
month from Mitsui & Co. and is seeking to purchase more.
DIVERSIFYING SUPPLY
“Companies need to get qualified products,” says Kim Seung
Woo, a senior analyst at Samsung Securities Co. “But as long
as the prices are right and there’s a guarantee that companies
are getting the products they need, they will want to diversify
supplies to reduce risks.”
GS Caltex Corp., which unloaded 800,000 barrels of Alaskan
North Slope crude this month is considering whether to buy more of the grade, according to a company official. U.S.
West refineries, traditional buyers of Alaskan oil, are turning to other North American crudes.
To defend market share, Arab producers are cutting prices instead of reducing output because their ability to influence
the value of benchmark crudes is waning as U.S. shale production boosts global supplies, according to Goldman Sachs.
The bank cut forecasts for Brent and West Texas Intermediate this week, saying a decline in benchmark U.S. prices
would need to fall to $75 a barrel to slow the growth in output.
SAUDI CUT
State-owned Saudi Arabian Oil Co., the largest crude exporter, on Oct. 1 cut its Arab Light price differential for shipments
to Asia to the lowest since December 2008. The company holds the largest stake in S-Oil Corp. (010950), South Korea’s
third-largest oil refiner. The joint venture helps ensure a market for Saudi oil and limits the amount of new crudes and
suppliers refiners can choose from.
The hunt for more oil suppliers goes on. Crude may flow from Canada to South Korea after the two signed a free-trade
agreement in September that removed a 3% import duty on oil. Asian nation’s refiners showing interest in Canadian
grades.
“It is because of huge demand for crude in Korea,” says International Energy Agency Executive Director Maria van der
Hoeven. “They would like to diversify their sources and that’s a very legitimate wish.”
http://www.bloomberg.com/news/2014-10-30/shale-boom-redraws-oil-routes-as-alaskans-ship-to-korea.html