South Korea will make more space available to store crude as it seeks to take advantage of its proximity to one of the oil market’s bright spots: China’s independent refineries.
“Demand has been continuously on the rise for more storage space from us as the market remains oversupplied,” said Semin Kwon, head of Korea National Oil Corp’s Singapore unit. “The proximity to China is attracting more interest from potential suppliers.” South Korea’s state-run explorer will offer 3.5mn barrels to 5mn barrels of crude storage capacity in the second half of this year through an optimisation process, Kwon said in a telephone interview on Wednesday. The company will complete five onshore tanks in Yeosu that can store a total of 2.5mn barrels of oil by the end of next year, and an underground cavern in Ulsan with a capacity of 10mn barrels will be ready by 2020, he said.
KNOC is expanding storage options as competition intensifies to supply China’s independent processors known as teapots, as these refineries are expected to buy more crude from overseas. Saudi Arabia recently sold its first spot cargo of oil to Shandong Chambroad from a leased tank in Okinawa, Japan.
Yeosu is about half the distance of Okinawa to Qingdao in Shandong province, where most teapots are clustered, which means lower shipping costs and faster delivery.
China’s inbound crude shipments climbed to a record in the first quarter in part as independent processors purchased more supplies from overseas after the government eased import rules last year. These smaller plants account for about 28% of the nation’s total capacity, according to ICIS-China, a research company. As of end-February, 27 teapots have obtained or applied for crude-import quotas totaling 89.5mn tons, according to the China Teapot Alliance.
Brent crude has declined for three years, sinking to a 12-year low in January as supplies continue to outpace demand. The surplus created a market structure known as contango, where prices for immediate delivery are lower than future months, making it profitable to buy oil for storage to be sold later at a higher price. Front-month futures were $3.27 cheaper than contracts expiring 12 months later at 8:11 a.m. London time Thursday on ICE Futures Europe exchange.
“The contango is increasing calls for more storage,” said Kwon. “It also makes it easier for companies to supply to teapots when the demand is there. A few days is all it takes for the shipments from Korea to arrive in China.” And distance does matter. State-owned Saudi Aramco’s maiden deal with a Chinese teapot should “lay any doubts to rest” about the company’s ability to use its logistical system and spot sales to boost market share, according to Citigroup. The 730,000-barrel shipment is expected to load in June.
KNOC plans to make space available in the second half of this year by relocating of some of its petroleum reserves already in storage in a process known as optimisation, according to Kwon. The location of the facilities that can be leased to third parties including producers and trading firms isn’t yet known as the move hasn’t been completed, he said.
South Korea’s storage facilities will be used as International Joint Stockpiles, giving the country the right to purchase the oil held inside in case of a national emergency, said Kwon. This also means they will be filled with strategic petroleum reserves if the need arises later, he said. KNOC has the capacity to store 133mn barrels of crude and oil- products, including the nation’s stockpiles. Of these, about 27mn barrels of space is currently leased.
“The goal is to become the distribution centre for not only South Korea, but also other regional players including China and Japan at a time when they’re showing bigger appetite for a wider variety of crude,” said Kwon. “With the increased storage space, we can become a more reliable and steady supply source for the region.”