Changing crude slate for Asian refiners

October 2015 | Arjun Chopra, Tim Fitzgibbon, Patrick Green


Over the past few years, Asian refiners have started to look beyond the conventional Middle Eastern and domestic sources for crude supply, increasing crude oil imports from regions such as the FSU, Latin America and West Africa. The increase in crude oil imports from these regions has been driven by three main factors: structural shifts in global crude oil demand and supply; energy security policies of Asian countries; and strategic crude oil procurement by complex Asian refiners.

Structural shifts in global crude oil demand and supply have been driven primarily by a rapid increase in North American crude oil production combined with a decline in crude oil consumption by European refiners. North America is awash with crude from the development of unconventional resources, which has backed out essentially all light crude imports into the US and made a big dent in the imports of medium and heavy crude as well. At the same time, European refiners have been using less crude as a result of weak local product demand and higher imports of finished products. This has resulted in crude oil from the FSU, West Africa and Latin America looking for markets beyond traditional destinations, increasingly flowing to Asia where crude demand continues to increase.

At the same time, Asian countries have been actively implementing energy security policies to ensure the uninterrupted supply of crude oil. Governments of large crude oil importers such as China and India have signed long-term crude supplying contracts with large crude producing countries like Russia and Venezuela. This has been helped by Asian refineries becoming more complex over the years, allowing them to more easily process heavy crude grades from regions such as Latin America


Exhibit 1


As a result of these factors, the crude slate processed by Asian refiners has changed quite significantly from 2009 to 2014. The most dramatic increase has been in imports from Latin America, increasing at a rate of 23% per annum over this period. Venezuela is the largest Latin American crude oil supplier to Asia accounting for almost 50% of the total Latin American flow, with the remaining flows coming from Brazil, Colombia, Mexico and Ecuador. This is slightly different as compared to Latin crude flows to North America , where Venezuela is the second largest Latin American crude oil supplier after Mexico and accounts for almost 30% of the total Latin American flows to North America  

India and China leading the way

The increase in Latin American flows has been led by India and followed by China. This has been driven by the complex refiners in those countries optimizing their crude slate to maximize their refining margins by processing cheaper heavy feedstock. Refiners in both countries have invested heavily in new refining capacity of very high complexity, at times getting ahead of the availability of heavy crude to fully take advantage of the complexity.

Together, India and China account for 92% of the total flows of Latin crudes to Asia.


Exhibit 2


Crude flows from the FSU region to Asia have increased at 17% per annum since 2009. China is the largest Asian importer of crude from the region, which is mainly driven by energy supply contracts at the government level. This is likely to continue as in 2014, Rosneft signed a deal with China to supply 270 billion dollars’ worth of crude oil over the next 25 years. Other main Asian countries importing FSU crude include Japan, South Korea and India.

Crude flows from West Africa to Asia increased at 10% per annum between 2009 and 2014. China and India have been the main importers of West African crudes, with an 87% share of the flow. Angola and Nigeria are the largest West African crude oil suppliers to Asia, sending approximately 1.5 million barrels per day of crude, or 10% of total flow to the region. The increase in West African imports into Asia has been a direct result of the rapid decline in US imports of the material. Since the surging US production has been mainly in light crude, West African grades – which have similar quality – were the first ones to be backed out of the US, forcing their producers to look for other markets.


Exhibit 3



Exhibit 4


More to come

Going forward, we expect Asian countries' dependence on out-of-region crude sources to increase because of the falling domestic crude oil production. The largest growth is forecasted to come from the Middle East, which will increase its crude exports to Asia by more than 2.5 million barrels per day by 2025. This assumes that Middle Eastern producers will recover some of their global market share compared with some more capital-intensive supply sources like deep-water or light tight oil. We believe this will disproportionately flow to Asia where Middle east crude us most competitive with other sources. Even with this increase, however, higher imports from Middle East will only just balance the anticipated fall in Asian domestic crude production, leaving other sources to supply the entire incremental growth in Asian crude demand.


Exhibit 5


Most of the remaining increase in crude flows to Asia will come from West Africa, which our modeling predicts will supply an additional 1.4 million barrels per day of crude. Some volatility is expected in these flows as West African crudes continue to remain the marginal flow connecting the Atlantic and Pacific basins, switching back to the Atlantic whenever there is additional crude demand there.

Crude flows from the FSU to Asia will also continue to increase, reaching 1.8 million barrels per day in 2025. This will be primarily Russian crude moving through the ESPO line, both directly to China (as a result of the long-term contracts in place) and through Kozmino terminal, of which a significant proportion will be sold on the spot markets to a variety of Asian refiners. Some of the increase will also be contributed by the Caspian region, primarily Kazakhstan.

In the short- to medium-term, Latin American crude flows to Asia will decrease slightly because of a combination of region’s declining crude oil production and increases in domestic crude oil runs driven by continuing products demand growth and refining capacity additions. However, this trend will reverse in the longer-term, resulting in a slight increase in Latin American exports to Asia by 2025.

Additionally, we expect Asia to start importing significant volumes of North African crude, as its increasing crude demand will combine with worsening prospects for North African producers to send their crude to Europe – their traditional market.

Implications for Asian refiners

We believe the growing diversity of Asian crude supply will be generally positive for regional refiners, as it will enable them to further improve their crude optimization strategies. However, in order to fully capture this opportunity, they will need to ensure that they will need to move beyond traditional crude procurement practices in a number of areas:

  • Term agreements - In some cases, it will be advantageous to shift from long-term procurement contracts to the spot market, allowing refiners to buy cargoes at lower prices
  • Market assessment – With more options from a more varied set of sources, refiners will need to understand pricing dynamics beyond the local region. This will be particularly important when negotiating longer-term agreements
  • Optimization – The planning optimization function will need to cast a wider net in considering crude types, but also intermediate purchases and sales. Optimizing over multiple time horizons will be more critical as refiners regularly consider crudes with very different transit times
  • Operational flexibility – Operationally, there may be significant value for some refiners to become proficient at managing more frequent and more dramatic crude slate changes to fully capture all of the opportunities provided by the market. This will require excellence in logistics and operations scheduling and best-in-class management of crude transitions
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About the authors

Arjun Chopra is a research analyst in McKinsey's Gurgaon office, Tim Fitzgibbon is a senior expert in McKinsey's Houston office, and Patrick Green is a knowledge expert in McKinsey's London office.