Europe looks to diversify crude sources

Even as inexpensive freight has attracted buyers from outside of the region to North Sea crude, it has helped to attract still more volumes into the region, providing Northwest European refiners with a plethora of choices from all over the world.
While much of the crude refined in Europe still originates in Europe – both larger and smaller grades from the North Sea, Varandey from the Arctic Circle, and Urals from Russia via the Baltic Sea – European refiners have been moving to substantially diversify their crude sources as they have gained access to more imports from the Middle East both via Turkey and the Suez Canal, as well as new, light sweet export streams from the US Gulf Coast.

Imports into Europe have been helped in large part by Dated Brent’s heavy premiums over other regional benchmarks – namely, Dubai and NYMEX WTI – throughout much of the second half of 2017, which saw flows from the Middle East continue despite cutbacks in production, and flows into Europe from the US push sharply higher.

WTI in particular spent most of 2017 pricing at fairly hefty discounts to both Brent and Dubai, which has helped to boost US crude exports around the world, displacing other grades like Nigerian light sweets on the slates of Asian refiners, and redirecting flows into Europe.

NWE crude sourcing by region

Most refineries in Northwest Europe are now likely to run as many as 40 different crudes as part of their refining slate, opening up new opportunities to maximize refinery margins wherever possible.

Additionally, while arbitrage for North Sea crudes outside of Europe has meant that there are fewer cargoes of Forties – and, occasionally Ekofisk – being refined within Northwest Europe, many European refiners have upped their refining of smaller North Sea crude grades, many of which are sold on a CIF-delivered Rotterdam basis.

Furthermore, crude production in Norway has expanded significantly beyond the traditional North Sea, with a number of newer fields coming online along the continental shelf – currently, the largest of these is the very light, naphthenic Asgard, which produces some 85,000 b/d, while Eni’s far North Goliat field has a capacity of 100,000 b/d, though production difficulties have prevented it from sustaining that sort of level. Russia, as well, has expanded crude extraction into the Arctic Circle and now loads approximately six cargoes of light Arctic crude out of its Barents Sea port of Murmansk each month, most of which goes to buyers in Northwest Europe.

This growing interconnectivity of Northwest Europe as a hub for global crude flows has meant that Brent has become a closely watched benchmark not just in Europe, but also in the US where it is eyed as a driver of exports, and in Asia, where it is viewed as a key factor in the determination of imports.

Middle East imports a major factor in European refining

Crude imports from the Middle East make up the largest share of the Northwest European refining slate outside of local crude grades from the North Sea and Urals from Russia, accounting for nearly 17% of all of the crude refined in the region, despite the 2016 OPEC/non-OPEC production cut agreement, which saw Middle East exports to Europe drop along with output.

In many ways, this is to be expected. Saudi Arabia and Iraq have always been key crude suppliers to refineries in Europe – particularly the Mediterranean – but over the past several years there has been a decided shift by many suppliers looking to target the European market specifically, which has seen crude cargoes from Kuwait, Oman and even the United Arab Emirates make their way into the key refining hubs in Northwest Europe, particularly Le Havre and Rotterdam.

Total’s lifting agreement with the National Iranian Oil Company in early 2016, struck shortly after the lifting of US sanctions against the country, ensured that Iranian crude – once a key source of supply for much of Europe – resumed regular flows into the region, with several VLCCs landing at the company’s refineries in Le Havre and Rotterdam each month. Even as production cuts have seen the number of cargoes slip in 2017, Iranian crude supply remains a major component of the European refining slate, helping to supplement the loss of volume coming from other major OPEC suppliers like Saudi Arabia.

Before agreeing to production cuts with Russia, Saudi Arabia began widening the number of buyers in Europe it sold its Arab Medium and Arab Heavy crudes to. At one point, cargoes of Saudi crude were routinely flowing as far north as Poland. The launch of a new stream of Basrah Heavy from Iraq’s southern terminals also contributed to an increase in the volume of oil moving through the Suez Canal, freeing up cargoes of Basrah Light that would have otherwise moved into the Asian markets.

North Sea crudes in Europe

US crude exports surge to Europe, Asia (‘000 b/d)

Simultaneously, Kuwait began to actively market its crude to European buyers. The state-owned Kuwait Petroleum Corporation began issuing of cial selling prices for crude delivered into Europe and pricing relative to Dated Brent in the first quarter of 2016; previously the country had priced all of its crude relative to Oman/Dubai. While exports were slow to get off the ground, 2016 saw a gradual increase in the amount being delivered to buyers outside of KPC’s own refining stream.

But the most notable addition in Middle East crude has been Iraq. Iraq’s northern crude stream, Kirkuk, long- plagued first by production problems, then by transportation issues, and finally by security concerns, was at one time a major source of sour crude in the Mediterranean. However, 2015 saw the establishment of a fresh flow of northern Iraqi crude through the semi-autonomous Kurdish region, which Erbil began marketing as Kurdish Blend Test. The new flow quickly dwarfed the previous Kirkuk flow, with exports climbing up above 600,000 b/d by early 2016.

Potential repercussions from SOMO, Iraq’s State Oil Marketing Organization, for companies seen to be purchasing KBT from the Kurdish Regional Government made many of Kirkuk’s traditional buyers reluctant to buy it, but it also freed up companies without SOMO contracts to pick it up, often at substantial discounts to the rest of the sour crude market. Consequently, cargoes of KBT wound their way into every corner of Europe and into the refining slates of buyers as far north as the Baltic Sea and everywhere in between. Even after the flow was cut as SOMO reasserted control of the region in late-2017, Kirkuk has continued to find its way into Northwest Europe.

US flows surge in 2017 as Brent’s premium to WTI widens sharply

The rise in US crude flows in 2016 and 2017 has been one of the most buzzed about stories in the oil markets, and while the surge in exports to Asia has dominated market coverage, the US has quietly become a major source of light sweet crude into Europe, supplementing the absence of North Sea barrels shipping to Asia.

Throughout the second half of 2017, the amount of crude shipping in from the Gulf Coast to refineries in Europe has jumped sharply, aided by a sharp rise in the price of Dated Brent relative to WTI, coupled with continued low freight rates. In December, combined US crude exports into the UK and Netherlands – Northwest Europe’s two largest refining hubs – totaled 329,000 b/d according to data from the US Census Bureau, a rate exceeding the total production rate of every other crude stream in the North Sea; Forties production, normally averaging above 400,000 b/d, was suspended throughout the majority of December due to the FPS shutdown.

By comparison, the US exported 264,000 b/d to China in December, and 406,000 b/d to Canada, its largest trading partner.
Between late August and late January, Brent’s premium to WTI did not drop below $4/b, which helped to encourage a steady flow of crude from the Gulf Coast, oil that found regular buyers, particularly in the UK. Between July and December, UK crude imports from the US nearly tripled, rising from an average of under 60,000 b/d between January and June to more than 140,000 b/d.

While US crude imports currently account for only just over 4% of the total crude refined in Northwest Europe, according to Platts trade flow software cFlow, that percentage is likely to continue to grow as US export infrastructure continues to grow out of the Gulf Coast over the next several years. Furthermore, the increase in supply from the US has started to put pressure on the prices other local sweet crudes are able to fetch in the local refining market, particularly light sweet crudes loading out of West Africa (currently just over 12% of the NWE refining diet) and North Africa (just under 5% of the refining pool.) Additionally, while most of the crude coming out of the US Gulf Coast is currently light and sweet, improved pipeline capacity in the US is likely to bring additional heavier, sourer volumes out via the Gulf, which could begin to compete more actively with traditional sources of sour crude like Russia’s Urals.

To read more about how the North Sea oil market is evolving, download the full report here.

Download the full report