LONDON Dec 21 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
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
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
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.