Oil refinery work may curb Forties flow to S.Korea
* S. Korean refiners plan maintenance in March, April
* South Korea Forties demand had supported Brent backwardation
* Reduced flows East could weaken Brent structure
By Claire Milhench and Alex Lawler
LONDON, Jan 31 (Reuters) - North Sea Forties oil exports to South Korea, a specialised trade that has supported crude prices, may drop in coming weeks due to maintenance at refineries, potentially weakening a source of support for Brent oil prices.
The flows - a result of a trade pact with the European Union - became a common feature of the North Sea market in 2012 and often support prices since Forties is part of the Brent oil benchmark.
South Korea enjoys a 3 percent tax break, or about $3 a barrel at current oil prices, under a free trade agreement with the European Union when it imports oil from European countries. This helps South Korean refiners cover shipping costs.
Forties crude has also increased in favour with South Korean buyers over the last 12 months as accessing its traditional market Iran has become more difficult.
South Korea's imports of crude oil from Iran dropped 35.6 percent in 2012 after Western sanctions, data from state-run Korea National Oil Corp showed. Western nations have imposed sanctions against Iran's nuclear programme which Tehran says is for peaceful purposes.
A total of 4 million barrels of Forties crude, or just over a third of the supply loading in January, is expected to arrive in South Korea in March. More tankers have been fixed to sail in early February.
But South Korean oil refiners including GS Caltex and SK Energy are scheduled to carry out maintenance at refinery units in March and April. This, analysts and traders say, could slow the eastward flow of oil later in February. An oil tanker takes about 50 days to sail to South Korea from the North Sea.
"We may see less Forties arbitrage to Asia on the back of seasonal Asian refinery maintenance," said Eugene Lindell, senior crude analyst at JBC Energy in Vienna.
More than half of the world's trade is priced against the North Sea dated Brent benchmark, consisting of four UK and Norwegian crudes, of which Britain's Forties is the most important.
Shipment of Forties out of northwest Europe tends to support its price differential to dated Brent, as well as prices in the wider Brent market, which comprises inter-month spreads and an array of swaps.
According to analysts at Energy Aspects, maintenance will take place at South Korean refinery units able to process 1.3 million barrels per day (bpd) between March and July and expectations of a reduced flow is already weighing on prices.
"Expectations of a closed arb to South Korea have already resulted in prompt spreads weakening significantly," said Amrita Sen of Energy Aspects.
Brent prices still reflect a perception of tight supply, although the premium at which oil for immediate delivery is trading has fallen in January.
The nearby Brent futures contract was trading at a $1.02-a-barrel premium to the second month, down from $1.28 on Jan. 2.
Some traders thought the impact of reduced flows to South Korea may be limited and already priced in.
Maintenance at the Buzzard oilfield in early March - the largest North Sea field contributing to Forties supply - will reduce output and could partly offset the impact of a dip in Korean demand, a trader said.
"It's really tricky to say how much Forties will come under pressure," said another. "The arbitrage can always work at the right price, and getting information about maintenance is not easy at all. Let's see what happens with the February VLCCs."
"I think that maintenance, while big, has been priced in already," said a third. "There will only be a short period where they do not buy."
Forties is more attractive to refineries in South Korea than other North Sea crudes, sources say, because they receive compensation for higher levels of sulphur in the oil.
The name Forties refers to a blend produced by more than 50 oilfields hooked up to BP Plc's Forties pipeline, including Buzzard, the largest UK field, and Forties, the original source of the crude.
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