SEOUL/SINGAPORE (Reuters) - South Korea will likely return to a familiar game plan to replace Iranian oil it will no longer have access to after May now that the United States intends to tighten sanctions on Iranian exports.
South Korea is the biggest buyer of Iranian condensate, an ultra-light oil prized by the country’s refiners as a raw material for petrochemicals manufacturing.
SK Incheon Petrochem Co Ltd, Hyundai Oilbank Corp and Hanwha Total Petrochemical are set to once again scan the world for alternative, but more expensive, condensate supplies and snap up heavy naphtha oil products for their processing units, known as splitters, industry sources and analysts said.
Last year, South Korea bought and tested as many as 23 different types of condensate from 15 countries as possible substitutes for Iranian condensate, at a cost of about $9 billion, government and trade data analyzed by Thomson Reuters showed.
South Korean petrochemical makers bought condensate from gas fields in Africa and Europe and even picked up an obscure cargo from Tunisia, in addition to tapping more supplies from Qatar, Saudi Arabia, the United States and Australia.
South Korean splitters are designed to process condensate from Qatar and Iran which are low in sulfur and produce no residue. These grades also have a bigger yield for heavy naphtha, a raw material for the production of petrochemicals such as paraxylene, used in making plastics bottles.
South Korean buyers have preferred Iranian condensate over Qatari condensate because of its relatively cheaper price.
“Those who can bear the cost would make investments and switch their import sources, those who can’t have to bite the bullet and use Qatari condensate,” said Kim Jae-kyung, research fellow at the Korea Energy Economics Institute.
This year South Korean refiners did not have to hunt as they made full use of the Iranian oil volumes allowed under the U.S. waivers by importing only Iranian condensate. Those waivers will expire on May 1.
(GRAPHIC: South Korea's Iranian condensate imports - tmsnrt.rs/2VYmT8L)
South Korea is on track to import about 249,000 barrels per day (bpd) of Iranian South Pars condensate by the end of April, 70 percent of the total volume of condensate it imported last year, the data showed, much more than it needs in the first half of 2019.
The country’s condensate demand has also fallen in the first half of this year as refiners cut runs at splitters on poor naphtha margins and as Hanwha Total shut a splitter for maintenance, the sources said.
(GRAPHIC: South Korea scours the world for Iran oil replacement - tmsnrt.rs/2IDibKC)
SK and Hanwha Total may replace condensates by buying more heavy naphtha, a raw material for petrochemicals. Low naphtha prices could help repeat a spike in imports that happened in late 2018.
Hanwha Total, which operates two condensate splitters, last year raised its monthly average imports of heavy naphtha to 400,000 tonnes from 250,000 tonnes in the absence of Iranian condensate.
Spot premiums of the fuel rose to multi-year highs last year after South Korea imported a record 20 million barrels of naphtha in December.
“Stronger demand for heavy full-range naphtha should happen although it could happen at a lesser extent versus last year because refineries in general are using more light crude. Buyers in South Korea may also have gotten some alternative condensates to Iranian grades,” said an industry source who tracks both markets.
(GRAPHIC: South Korea's naphtha imports jump in Q4 2018 on Iran condensate supply disruption - tmsnrt.rs/2IALtJV)
To help refiners source alternative supplies, the South Korean government plans to extend freight rebates for shipments of non-Middle East crude to the end of 2021, South Korea’s energy ministry said on its website in mid-April.
The United States, with its record growth in light oil production, would be an ideal supplier to replace condensates but quality issues have thrown South Korean buyers off.
“They’ve (South Korean refiners) raised some issues with respect to quality control in the context of U.S. production and in the way U.S. condensates are marketed,” Assistant Secretary of State for Energy Resources Frank Fannon told reporters on Thursday.
“We would really encourage the respective companies at issue, or other exporters, as well as the potential buyers in the private sector in Korea to engage one another.”
To import more U.S. oil, SK Energy has expanded its trading team in Houston to three staff while Hyundai Oilbank plans to start an office there, three trade sources said.
Still, buyers are concerned that the end of U.S. waivers on Iran will drive up production costs for their petrochemicals, making South Korea less competitive in the face of rising supplies from China.
Lee Myoung-young, the head of the finance division at SK Innovation, owner of SK Incheon Petrochem, said in a call with analysts on Thursday that the company would not have any issues sourcing feedstocks, although prices may increase on tighter supply.
Another source at a Korean petrochemical company who declined to identified due to the sensitivity of the matter said: “If we can’t pass higher raw material costs to customers, it’ll be a problem for us.”
(GRAPHIC: South Korea's 2018 condensate imports by country - tmsnrt.rs/2XyP0fi)
Reporting by Jane Chung in SEOUL and Florence Tan in SINGAPORE; additional reporting by Seng Li Peng in SINGAPORE; editing by Christian Schmollinger