Middle East producers should reconsider the 'Asian premium'

19 October 2017
Asian countries have begun to look at US shale as an alternative to Middle East crude

In October, the first shipment of US shale reached Paradip port on India's eastern coast - marking a subtle but important shift in how energy-hungry nations will look to diversify away from traditional Middle East suppliers.

India's first shipment of 1.6 million barrels of crude, forms part of a cumulative order to import 3.9 million barrels from the US. It follows recent moves by South Korea, Japan and China to tap into US shale.

While Middle East suppliers kept their sights on stabilising oil prices and reducing global inventory glut, they may have perhaps ignored the competitiveness of shale oil for Asian countries

Countries like Japan and India have long complained about having to pay a premium on importing crude from the Middle East. Asian countries allege that they have been paying a premium of $1 to $1.5 higher per barrel than US and European markets since the 90s. The Institute of Energy Economics Japan has found that the existence of this premium has cost its economy an addition $4bn-$8bn annually. India's petroleum and natural gas minister Dharmendra Pradhan recently raised the issue with Opec, accusing some of its members, particularly Saudi Arabia of asking Asian countries to subsidise their exports to Europe. He suggested that Middle East producers offer an "Asian dividend" instead, since much of global demand will continue to grow from the East.

Japan and China, on the other hand, are seeking a different path to overcome this nagging issue, choosing instead to invest in concessions in the Middle East. Abu Dhabi National Oil Company (Adnoc) is in talks with Chinese and Japanese firms to invest across its energy value chain. Japanese Oil Development Company is currently in advance discussions to extend the lease on one of its offshore concessions, while China National Petroleum Company took an eight per cent stake in Adnoc's subsidiary that operates onshore concessions.

While some Asian countries pursue operatorships of Middle East concessions, others may choose to substitute US shale instead.

The US crude shipment received by state refiner Indian Oil Company is said to have worked out more competitive - shipping costs included - than a cargo of similar volume from the Middle East.

A trader speaking with MEED said that in other cases arbitrage and freight economics could go against importing US shale to Asian countries.

However, if supply restrictions begin to tighten because of Opec cuts currently in place then refineries in Asia will increasingly look for other options, including US shale.

Following the recent strengthening of ties - including energy - New Delhi has been assured by the Trump administration that it would be willing to supply more to Indian refiners.

While oil prices have risen moderately to just under $60 a barrel - following a tense geopolitical standoff in Iraq - the market is still a long way off from $100 crude.

Middle East suppliers, who kept pumping to maintain their market share in 2014, must be wary of US shale securing supply in Asia by offering crude at competitive prices.

If Asian countries continue to be burdened with the pressure of having to pay a premium, it won't be surprising if the government of Pakistan for instance, would turn to Continental Oil to keep its refineries running.

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