COLUMN-Oil marketers ask: who will buy my crude? John Kemp
LONDON Dec 21 (Reuters) - Marketing production is more associated with technology and entertainment than grubby industrial raw materials like oil. But marketing is set to become more important as the oil market moves into surplus and struggles with an increasingly diverse range of crudes.
Crude marketers need to convince refiners their oil is worth paying a premium for and to undertake expensive investments to be able to process it.
Outlining its strategy to investors in October, Continental Resources, one of the leading producers in North Dakota's Bakken, devoted a third of its presentation to the importance of improving the marketing of its output to secure more recognition of its quality and achieve higher prices.
Continental promised a marketing strategy that would improve Bakken's value relative to other benchmarks by expanding access to coastal markets, increasing market recognition of the superior quality of Bakken oil, and establishing Bakken as the preferred source of supply. At the moment, Bakken crude is selling well below benchmarks like Brent and WTI because of transportation bottlenecks.
Continental has been busy adding transportation capacity by both pipeline and rail to carry its Bakken crude away from the oversupplied midcontinent market to coastal refineries who would be prepared to pay more for it.
But the company is also keen to convince refiners its crude is superior to competing conventional grades and more valuable than oils from rival shale plays such as Eagle Ford. Continental's full presentation is available on its website and is worth reading in full (slides 18, 32 and 86-105).
SELLING THE BAKKEN
According to the company, Bakken is lighter and sweeter than North American benchmarks such as Louisiana Light Sweet , Alaska North Slope and Kern County . It is also ligthter and less-sulphurous than international rivals like Nigeria's Qua Iboe and North Sea Forties .
Bakken produces a far higher share of valuable light products and far less residuum than other markers, without the need for expensive conversion and upgrading.
When distilled, one barrel of Bakken will yield about 43 percent of products in the gasoline range, and more than 10 percent suitable for making jet fuel, as well as 43 percent in the distillate zone, leaving almost no heavy residuum.
According to Continental, the distillation products from Bakken were worth almost $131 per barrel compared with $127 for WTI and just $120 for Forties, based on crude and products prices on September 21.
Bakken's quality is also far more consistent than output from Eagle Ford, the other big shale play. Bakken has a consistent quality of 42 degrees API, where Eagle Ford crude/condensate ranges widely from as little as 28 degrees to as much as 63, and must be blended to achieve even quality.
With better marketing, Continental aims to supplant higher-priced foreign sweet crudes like Qua Iboe and Forties as well as Alaskan North Slope.
The company is marketing Bakken as a blending stock to enable heavy, sour oil refiners to meet specifications for low-sulphur products. It can enable higher refinery run rates with fewer problems with dangerous vapours and hard to handle distillation residues. Continental wants Bakken to become a "favourite feedstock of lube and petrochemical manufacturers."
There is nothing new about crude producers claiming that their oil is better or more competitively priced than their rivals. But two trends will ensure that marketing efforts are set to become more intense over the next five years.
The oil market is entering a phase of (potential) oversupply. If all the potential new sources of crude supply, including shale oil in North America, oil sands in Canada, deepwater off the coasts of Latin America and West Africa, and conventional oil from Iraq and Iran, let alone the Arctic are developed in the next five years, then refiners will have more choice.
The range of qualities on offer is also widening. Before the shale revolution, most refiners expected the slate to become heavier and sourer average in future, as the marginal source of supply became Canadian oil sands and Venezuela's ultra-heavy oils. Shale means they now also have a choice of ultra-light and sweet crudes as well, not just crude from oil wells but also condensates from gas fields.
This cornucopia of crude is complicated, however, by pipeline constraints and other transportation bottlenecks. Not all crudes are available to all the refiners who might be prepared to pay for them.
It has led to an unusually wide dispersion in prices for different crude grades. In the second week of December, when Forties was trading around $110 per barrel, and Nigeria's Qua Iboe was fetching $113, West Texas Intermediate blend at Midland in Texas was selling for just $75 and Alberta's Western Canada Select (WCS) was fetching less than $45. Great if you have Qua Iboe to sell, not so great if your price is pegged to WCS.
All crude producers are now acutely aware of the importance of marketing their oil to maximise its value in the marketplace. U.S. shale oil was a "big issue" and OPEC should make its oil more attractive to customers in response to the supply of shale from the United States, UAE Oil Minister Mohammed bin Dhaen al-Hamli said at the recent cartel meeting in Vienna .
Value is not simply about sulphur content and distillation cuts. Other aspects include location, transportation options and reliability and security of supplies.
Most refineries will want to adopt a portfolio approach to buying crudes in order to maximise the value of outputs while minimising the cost of acquisition and avoid becoming overly dependent on any single supplier.
Refiners must also be persuaded to commit to making long-lasting and expensive changes to the configuration of their plant to handle particular crude combinations.
As the specifications for refined products become stricter, while the range of crude grades becomes broader, marketing to maximise the value captured from crude production is set to become more important than ever.