October 3, 2011 / 12:25 PM / 8 years ago

Q&A-Shell's shutdown may impact Asian gasoline mkt

* Shell is a major supplier of gasoline in the region

* Could be in direct negotiations with producers for gasoline

* Naphtha market impact minimal as Shell rarely exported

By Seng Li Peng

SINGAPORE, Oct 3 (Reuters) - The shutdown of Royal Dutch Shell’s Singapore refinery will impact the gasoline market as the massive 500,000 barrel per day (bpd) plant is a key supplier in the region.

Shell has a quarterly term agreement with Indonesia, and sells 92-octane spot cargoes to Vietnam and India.

The quarterly 88-octane volumes it supplies to Indonesia is about less than 3 cargoes a month. While the outage may not reduce Indonesia’s imports as the nation has more than 10 suppliers to provide up to 9 million barrels a month, it will help strengthen regional prices.

The impact on naphtha is likely to be minimal as it mostly uses the fuel at its ethylene cracker, which has also been shut down, and sells a small volume to Petrochemical Corp of Singapore (PCS) in Jurong Island.

Since Shell is shutting its cracker, it will hardly need to source for naphtha offsetting any major impact on the light fuels market.

Physical naphtha cracks dived some 16 percent to reach a 7-week low of $110.93 a tonne premium on Monday. Gasoline cracks were at $12.69 a barrel, nearly double last year’s average of about $6.05 a barrel.

The shutdown of the plant, Shell’s largest in the world, has prompted the major to declare force majeure on petroleum and petrochemical supplies.

WHY LIMITED IMPACT ON NAPHTHA?

Shell’s refinery mainly supplies naphtha to its own 800,000 tonne per year (tpy) ethylene cracker, which can also take in other types of feedstock, including liquefied petroleum gas (LPG) and heavy liquid hydrocarbon such as hydrowax.

It has a 70,000 bpd condensate splitter, which traders estimate could yield around 130,000 tonnes of naphtha a month at full capacity.

Naphtha from the condensate splitter is used to supply PCS, which owns two naphtha crackers with a total annual capacity of 1.09 million tpy.

PCS’ crackers were not running at full capacity before Shell declared the force majeure on naphtha supplies because of persistent weak ethylene margins.

At full capacity, PCS would need around 290,000 tonnes of naphtha a month, or close to 10 medium-range cargoes, approximately.

PCS would at most need around 2-3 medium range cargoes to for prompt delivery, traders said.

“I have heard they have already secured one cargo. Their purchase hasn’t had that much of an impact on the market,” said a Singapore-based trader.

WHY IS GASOLINE DIFFERENT?

When it comes to gasoline, Shell’s Singapore plant often supplies higher grade of the fuel - 95-octane and 97-octane - to the company’s other refineries in the region.

Shell has not been an aggressive buyer in the cash market, resulting in physical cracks softening. The company could be in direct negotiations with other producers to secure supplies, traders said.

It’s limited buying and bidding since the fire broke out last Wednesday is in sharp contrast to when it shut its Port Dickson refinery in Malaysia for a planned maintenance.

During that time, it bought six 97-octane gasoline cargoes totalling around 300,000 barrels for May loading from Singapore in the cash market in four trading sessions between April 28 and May 3.

Since the incident in its Singapore plant, Shell had bought just two 95-octane cargoes for October and made an unsuccessful attempt to buy a cargo on Oct. 3.

Overall in the month of September, it had bought around 17 cargoes of gasoline for September-October lifting versus about 9 cargoes in August for August-September loading.

HOW WILL IT IMPACT GASOLINE SUPPLIES?

Gasoline prompt supplies are still relatively tight, although better than before as peak demand season had eased, traders said.

Gasoline demand usually is at its peak during the Muslim fasting month, which was in August.

“If there is a prolonged shutdown, Shell may have to rely on barrels outside Asia,” said a trader.

“We have to monitor its movements in the cash window. If you see them bidding up, it means they are trying to pry open the arbitrage window.”

Gasoline cargoes from the western rarely move East, as Asia is net long in supplies if refineries crank up their runs.

“Asia has the potential to be long by 300,000 bpd. It depends on how hard refineries are running,” said Victor Shum of Purvin & Gertz. “Looking at recent years, on average (on an annual basis), it is not unusual for the Asia Pacific market to be long 100,000 bpd or so.”

Yet, China, once the second-biggest supplier to Asia after India, has been keeping imports low due to domestic demand.

Also, Taiwan’s Formosa hasn’t ramp up operations fully after it was forced to shut its refinery in end July following a fire and the company declared force majeure on supplies. (Reporting by Seng Li Peng; Editing by Manash Goswami)

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