MOSCOW (Reuters) - Six years after its first export shipment, Russian crude ESPO Blend is as far from becoming a regional benchmark as it was then.
It remains an also-ran in Asia-Pacific despite its high quality, annual shipments of 30 million tonnes and the proximity of Japan, China and South Korea, Asia’s major crude importers.
Traders attribute the lack of progress to lower liquidity and a late release of shipment schedules.
“As counterintuitive as it is, a late release of shipment schedules for (the Far East port of) Kozmino is one of the biggest problems,” a trader at a major exporter said.
Despite higher shipments, most of them are done under long-term contracts, and the blend is not winning new customers.
The number of customers has effectively shrunk to two, China and Japan, in the last couple of years. While the two countries have always been the largest ESPO Blend importers, the list used to include South Korea, the US, Malaysia and other destinations.
Long-term contracts accounted for 7 million tonnes of the 30 million tonnes shipped in 2015, almost twice as much as a year earlier. That doesn’t include the 4 million tonnes that Rosneft sold to Trafigura in 2015 because the trader sells those on the spot market.
Market participants do not rule out the possibility that more ESPO Blend will be sold under long-term contracts next year as they are popular among sellers and buyers, especially the Chinese.
China was the largest buyer of seaborne shipments of ESPO Blend in 2015, accounting for 40 percent of deliveries from Kozmino. China’s share exceeded 50 percent in the second half of the year. Unipec, CNPC and Chemchina were the top customers.
While Unipec has been a major player on this market for the past three years, CNPC and Chemchina increased ESPO Blend imports in 2015 due to cooperation with Rosneft.
CNPC bought 31 100,000-tonne ESPO Blend cargos from Rosneft this year. The export schedule for January-March shows that CNPC is expected to receive 800,000 tonnes of the blend.
The company also receives the crude via the Skovorodino-Mohe pipeline, but it wasn’t able to confirm early this year that it can increase pipeline volumes to 20 million tonnes as stipulated by the contract and offered to buy more cargos instead.
Traders have said CNPC overestimated its needs and that seaborne shipments give it more flexibility.
Russia’s pipeline monopoly Transneft releases export schedules for Kozmino five weeks before the first day of the delivery month - three weeks earlier than for the Baltic ports. But that is still not good enough, traders say, because customers normally make deals two or three months before the shipment date.
That makes it impossible for buyers to compare refining margins for ESPO Blend with other blends, which sometimes can be good for premiums but prevents the blend from becoming a benchmark, market participants say.
The late sales mean that ESPO Blend is almost immune to fundamentals that influence the other crudes on the Asia-Pacific market.
“The Middle East and African crudes that go to Asia-Pacific sell two or three months before the loading date, while ESPO Blend sells about six weeks before. That means that the Russian blend hits the market after the Asian refiners have covered their needs,” said a major player in the ESPO Blend market.
“So ESPO Blend certainly looks more like an alternative than a major blend.”
ESPO Blend exporters actually try to begin sales a week or two prior to the release of the export schedule based on tentative dates, aiming for a better price but sometimes losing money in the process.
Major exporters benefit the most. Surgutneftegaz, for instance, routinely sells one or two cargos before the 10th of the month, while the export schedule for Kozmino is not released until after the 20th.
Chinese teapot refineries, some of which recently received quotas for crude imports, have supported the ESPO Blend market in the second half of 2015.
For example, Checmchina, the first independent refiner to receive an import quota in 2013, has been buying 100,000-200,000 tonnes a month for the past six years at Rosneft’s spot tenders. Together with cargos from Surgutneftegaz, Gazpromneft and smaller producers, Chemchina purchased 2.5 million tonnes of the blend this year.
“This wasn’t a stellar year for ESPO Blend, but Chinese teapot refineries came to the market late in the year. ESPO Blend is an excellent opportunity for them to get the feel of the market,” said a trader with an oil major.
“There is enough spot volumes and the export route is short. I think this demand will remain a positive for the price of the blend for quite some time.”
“I don’t think the additional demand for ESPO Blend from China has topped out. We will see more new buyers,” said an official at a major trader.
But for now China seems to be the only opportunity for growth as crude refining in Japan, another permanent customer, is declining.
JX Nippon Oil&Energy was the largest buyer this year with some 5 million tonnes. It has two long-term contracts, with Rosneft and Tenergy, each for 100,000 tonnes a month.
South Korea’s SK Energy, one of the top ESPO Blend customers in 2013, have effectively lost interest due to the relatively high price and a wide choice of alternatives, having purchased seven or eight cargos this year.
Writing by Denis Pshenichnikov, editing by Kevin O'Flynn