South Korea's dependence on Middle Eastern crude hits 25-year low in 2021

South Korea's dependence on Middle Eastern crude hit a 25-year low in 2021, latest data from state-run Korea National Oil Corp. showed, reflecting the country's growing interest in cheap and abundant supplies in the Americas amid tight Persian Gulf production and expensive official selling prices.

The world's fifth biggest crude importer bought 574.4 million barrels from Middle Eastern suppliers in 2021, accounting for 59.8% of 960.2 million barrels refinery feedstock purchased during the year, the lowest since 59.4% in 1986, the KNOC data showed.

The share of South Korea's Middle Eastern crude imports has been above 80% over the past two decades, according to S&P Global Platts calculation based on KNOC data. The country's 2021 crude imports from producers in the Americas, including the US, Mexico, Brazil, and Ecuador, rose 18% to a record high of 204.2 million barrels.

The decline in Middle Eastern crude imports was inevitable, as the OPEC+ continues to adopt a tight supply stance, with the pace and scale of the producer group's production increase falling short of Asian end-users' expectations, feedstock managers at major South Korean refiners said.

Refiners advancing their feedstock diversification strategy with refining systems and efficiency upgrades accelerated the cutback in Middle Eastern crude shipments, according to analysts at Korea Petroleum Association.

"South Korea has the most sophisticated refinery systems in Asia, and South Korean refiners are probably the most flexible in terms of fast switch or fast diversification of feedstock choices ... it's no surprise the local refiners had little issue significantly cutting back on Middle Eastern crude purchases and shifting to new supplies from elsewhere," a senior market research analyst at KPA said.

Hyundai Oilbank had been leading by example by maximizing margins and efficiency, as the refiner took full advantage of its state-of-the-art facilities, including its 80,000 b/d solvent deasphalting unit, to crack South American heavy crude oil.

Cost efficiency

Trading economics was another crucial reason behind South Korea's efforts to step up its crude import diversification strategy, market and trading participants said.

Major Middle Eastern producers consistently increased their OSPs through much of 2021, reflecting the tight OPEC+ supply strategy, while adding a cost burden on many Asian end-users as international benchmark outright prices rose.

South Korean refiners found lighter and sweeter US crude grades cheaper to import because of an extensive trading network and know-how, as well as the government's support. South Korea imported 118.7 million barrels of US grades in 2021, up 13.7% from 2020.

The US-South Korea free trade agreement provides South Korean refiners an advantage over other Asian end-users while concluding US crude trades. Seoul continues to grant some freight incentives to refiners purchasing crude oil from regions other than the Middle East, according to feedstock management and trading sources at two major South Korean refiners.

South Korean refiners paid $70.50/b on average for US crude shipments in 2021, according to latest data from KNOC, compared with an average of $71.85/b and $71.57/b, respectively, for Saudi and Kuwaiti crudes over the same period.

Brazilian crudes were also cheaper to import for South Korean refiners than most Persian Gulf supplies, despite the longer voyage, costing $70.40/b on average for 23.3 million barrels in 2021.

KNOC's import costs include freight, insurance, tax, and other administrative and port charges.

Iran, a potential game changer

South Korea will likely rekindle its interest in Middle Eastern cargoes if sanctions on Tehran are lifted, making way for the Iranian crude to return to the global and Asian markets, sour crude and condensate traders based in Singapore and Seoul said.

"Considering the highly economical aspect of Iranian crude, especially the South Pars condensate, it would be difficult for South Korean end-users to resist Iranian supplies when the trades are allowed, even though it is still a very big 'if' at this stage," said a feedstock manager at a South Korea petrochemical maker that used to depend heavily on Iranian South Pars condensate.

Asian refiners and petrochemical companies are hoping for Iranian supply to return to international markets in 2022, with OPEC+ seemingly hesitant to accelerate the pace and scale of crude production.

A Platt's survey of 26 traders, middle distillate marketers and refinery officials in Asia showed that 46% of the participants expect Iranian crude trades to resume by end-third quarter, with 23% of the respondents seeing a full return of the Iranian supply by end-2022 and 15% expecting Iranian trades to remain blocked.

South Korea typically imported Iranian crude and condensate of more than 11 million barrels/month on average prior to the sanctions, making it one of the top three suppliers before 2018.

South Korea's top 10 crude suppliers in 2021 (Unit: '000 barrels)

*Total includes other suppliers

Source: Korea National Oil Corp.