Japan surprises with Russian fuel oil thirst

By Luke Pachymuthu and James Topham - Analysis

SINGAPORE/TOKYO (Reuters) - Japan is unexpectedly emerging as Asia's top buyer of Russian fuel oil this year as at least two of its refiners begin using it to make refined products, robbing Chinese rivals of the cheaper feedstock.

Exxon Mobil's Japan affiliate TonenGeneral Sekiyu and Kyokuto Petroleum Industries, a joint venture with Mitsubishi & Co, have for several months been quietly using straight-run fuel oil from Russia, commonly known as M100, as crude prices hold near record-highs, trade sources say.

Trade sources in Asia said Exxon Mobil Japan had secured a term deal with European trader Vitol for the monthly supply of 120,000-140,000 tonnes, or between three and four cargoes of the distillates-rich M100, over the next six months.

As crude oil relentlessly rises, hitting a record above $112 a barrel this week, Japanese refiners have slashed crude processing rates in a bid to cut losses, or seeking cheaper supplies like M100, now $27 a barrel less than crude.

"As a refinery, if you mix it with another crude, you can use it as a CDU fuel... and certainly Exxon Mobil has been using Russian grade fuel oil, as a cheaper alternative fuel," a Tokyo-based trader said.

As much as half a million tonnes a month of M100 is exported by refineries in Russia's Far East, traders say.

An Exxon Mobil Japan spokesman confirmed the company had been buying the Russian grade heavy fuel oil but declined to provide further details. Kyokuto Petroleum declined to comment when contacted.

Japan's top refiner Nippon Oil Corp is not expected to run fuel oil anytime soon, but said its rivals were.

"We have no plans in the short term to use fuel oil...but some refiners are already buying fuel oil to use as feedstock,"

Naoki Tsuchiya, director, senior vice-president for overseas division, Nippon Oil Corp told Reuters in Qatar this week.

GRADUAL RISE

The data bear this out.

Japan's fuel oil imports leapt from about 40,000 tonnes (or one cargo) a month in the first part of 2007 to a record high of 250,000 tonnes in December, government data showed. February imports remained high at 140,000 tonnes.

Japanese demand has helped drive up premiums on Russian fuel oil to $70-$75 a tonne from $45-$50 a tonne in the last quarter of 2007, traders said.

That has forced China's independent refiners to seek out alternatives, primarily fuel oil from Iran, which also have a high diesel yield.