October 3, 2011 / 12:40 PM / 9 years ago

UPDATE 2-Oil markets hit as Shell Singapore cancels deals

* Cancels lifting 4 mln barrels of October Saudi crude

* Shell begins shutting Singapore chemical cracker

* Stops naphtha, NEG supplies

* Damaged area that controls outflow of clean products (Adds details about refinery, market impact on crude)

By Yaw Yan Chong

SINGAPORE, Oct 3 (Reuters) - The impact of a fire at Royal Dutch Shell’s (RDSa.L) Singapore refinery has extended into the crude and naphtha markets, strengthening price spreads for both markets, traders said on Monday.

The closure of Shell’s 500,000 barrel-per-day refinery, its largest in the world, has led the oil major to cancel the lifting of 4 million barrels of crude, to wind down its petrochemical complex and to declare force majeure on some of its deals, mostly involving distillates.

Shell’s Singapore chairman, Lee Tzu Yang, confirmed the force majeure but did not give details, and its spokesman declined further comment on Monday.

The fire last week severely damaged the equipment that controls the outflow of most of the refinery’s clean oil products, including gasoline, naphtha and middle distillates, from processing units to storage tanks.

“Basically, the problem is getting the products out. Most, if not all, of Shell’s infrastructure for the delivery of its clean products has been destroyed,” a refining source said.

“Even if the refinery is kept running, they would not have been able to get the products out, leading to tank-top situations, which would probably have worse repercussions.”

CRUDE, NAPHTHA MARKET REACT

The crude market reacted to the fire for the first time, with unusual volatility in the price spread between Brent and Dubai, or the EFS.

The November EFS contract widened to a two-week high of $5.35 at midday on Shell’s cancellation of Saudi Arab Light crude imports for October lifting .

They then dropped back to $4.90 by the Asian close as players decided that the market impact was not as big as they had initially believed, traders said.

Naphtha’s prompt October/November timespreads rose to a backwardation of $5.75 a tonne, up 75 cents from the previous session. Shell was seen buying the contract on Monday after selling last Wednesday, soon after the fire first broke out.

The bullish sentiment resulted from Shell’s declaration of force majeure on its October-delivery naphtha supplies to its term customer, the Petrochemical Corporation of Singapore (PCS), industry sources with direct knowledge of the situation said.

Shell has also declared force majeure on deliveries from its 750,000 tonne-per-year (tpy) monoethylene glycol (MEG) plant as it winds down the operating rate of its petrochemical complex, which also includes an 800,000 tpy ethylene cracker.

“The cracker is as good as stopped. It’s just being run down slowly and will reach zero in a week or so, when the balance of naphtha supplies left in tank finishes,” the source said.

“The feed from the cracker to the MEG plant is also similarly slowed and will also reach zero at some point.”

Monday’s move follows the declaration of force majeure on at least 1.5 million barrels of mostly distillate cargoes, for loading between Sept. 28 and Oct. 6, transacted over the end-of-day pricing window.

The cracker, commissioned last March, uses up to about 210,000 tonnes of naphtha per month at full capacity and has been running at 80 to 85 percent of capacity, traders said.

The refinery on Singapore’s Bukom island is estimated to yield 200,000 to 250,000 tonnes of naphtha per month.

VITAL EQUIPMENT DAMAGED

The refinery is expected to take at least a month to start functioning again and possibly even up to six months to return to normal operating levels, the sources said.

Shell and Singpore’s Ministry of Manpower are both currently investigating the cause of the fire. Repair work is not likely to start until the completion of the investigations, which normally take a week or two.

Vital repairs are needed on the equipment that controls most, if not all, of its outflow of clean products, known as the “Offsite Area”.

This includes the pump house, in the vicinity where the fire started, which has 35 specialised pumps that regulate the flow of its clean oil from the process units through the many pipelines and into storage tanks, the sources said.

Most of the pipelines were also severely damaged, crippling the entire site, they added.

“It would take a while, at least a month, before the first drops of oil start coming out of the refinery. It will be a slow and gradual process to take back it to normal levels,” one of the sources said.

“No one knows for sure how long it will take before the whole plant comes back, but looking at the damage, it would safe to say that three months is not unrealistic, but it could also drag up to six months.”

Apart from this area, none of the refinery’s processing units, from its three crude distillation units (CDU) to secondary units such as the hydrocracker and the fluid catalytic cracker, were damaged by the fire, which blazed for more than 30 hours.

The source added that there are two Offsite Areas in the refinery. The area for dirty products such as fuel oil is undamaged.

“The good news is that none of the major units are damaged. But they cannot restart until at least some of it can flow out. And that’s a problem now,” another of the sources said.

Additional reporting by Seng Li Peng and Alejandro Barbajosa; Editing by Jane Baird

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