TMX Canadian crude arbitrage to east China rises on viable economics

Arbitrage inflows of Canadian heavy crude cargoes transferred via the Trans Mountain Expansion pipeline into Asia, particularly east China, have risen as the grade remains competitive over its closest competitor -- the Middle Eastern Basrah Heavy crude.

Since the commencement of the TMX pipeline, China has been a regular buyer of the Access Western Blend.

East China has seen a surge in procurement, led by China's Rongsheng Petrochemical that bought at least 10 Aframax-sized cargoes, total 5.5 million barrels, since late May, for August-November delivery, according to data compiled by S&P Global Commodity Insights.

Rongsheng Petrochemical is a parent company of the 800,000 b/d Zhejiang Petrochemical & Chemical and the barrels are taken for China's top private integrated mega refinery located in the eastern Zhoushan city.

The plant annually has taken around 18 VLCC cargoes, or 36 million barrels, of Basrah Heavy in recent years, while the volume reached 22 million barrels over January-July, Commodity Insights data showed.

"With some AWB barrels in hand, Rongsheng is more likely to cut Basrah Heavy buying. The crudes are alternatives to each other in the heavy sour category," a trader with a Chinese state-owned oil company said.

Sources with Rongsheng Petrochemical were not available to comment.

Canadian AWB is a high TAN, heavy sour Canadian crude with about 22 API degree and 4% sulfur content, while Iraqi Basarh Heavy is low TAN with about 24 API degree and 4.05% sulfur content.

The latest trade heard by Rongsheng Petrochemical was for four AWB Aframax cargoes from P66, CNOOC, Vitol and BP, respectively, for November-delivery at a discount in the low $6s/b to January ICE Brent, DES Zhoushan.

"AWB is commonly blended due to its higher condensate and residue content, while Basrah Heavy has higher middle distillate content but lower naphtha and residue content," a trader noted.

This comes as Iraq's SOMO issued the official selling price differential for Asian buyers, with September-loading Basrah Medium and Heavy crude set at parity and a discount of $3/b, respectively, to the average of Platts Oman/Dubai assessments, up 10 cents/b and stable from August, respectively, S&P Global reported previously.

Viable Economics

PetroChina had previously disclosed that the CFR cost of its first AWB cargo via TMX, which was delivered to its Guangxi Petrochemical in early July, was about $2/b lower than that of the regular Middle Eastern grades.

Therefore, in addition to Rongsheng Petrochemical, China's state-owned Sinochem, CNOOC, PetroChina and Sinopec have taken at least 6.1 million barrels of AWB for June-September delivery, Commodity Insights data showed.

A south China-based refining source said heavy sour crudes are more favorable for refineries with coking units or asphalt plants, led by the sophisticated Sinopec Maoming Petrochemical and Zhenhai Petrochemical, PetroChina's Guangdong Petrochemical as well as the private mega refineries like ZPC, but the government has banned construction of this type of facility amid tightening environmental controls.

"Most refiners in China would have to blend AWB with a lighter crude grade to reduce its sulfur content and density before feeding into their CDUs," a market source said.

A Sinopec refinery in east China, which usually processes around 100,000 metric tons of heavy crudes monthly in recent months, has started to include AWB into its heavy crude portfolio in July, with a portion of 30% Ecuador Napo (API 17, 2.3% sulfur) against 70% of AWB, instead of 100% of Napo crude in June and April, according to a company source.

In the previous months, the refinery also included Basrah Heavy and Castilla into its heavy crude basket. In May, 131,000 metric tons of Basrah Heavy, 119,000 metric tons of Napo and 30,000 metric tons of Castilla was processed in the heavy portfolio.

Meanwhile, a source with PetroChina's Guangxi Petrochemical noted it would require around two months to process AWB crude, by mixing with other crudes due to its heavy density.

The refinery, designed to refine medium sour crudes, received PetroChina's first 550,000 barrels of AWB via TMX.

Asian buyers remain price sensitive

"The popularity of Canadian crudes, mainly AWB, is mainly due to the competitive prices for promotion as TMX starts operation. But the sustainability will eventually depend on the market price of the crudes and freight," the refining engineer with Sinopec said.

"PetroChina caught the best opportunity to co-load with 1.1 million barrels of AWB and 900,000 barrels of Ecuador crude into a VLCC in the US west coast to cut freight from shipping directly by two Aframax vessels," the engineer added.

"[Rongsheng] ships it individually on Aframaxes, not VLCCs," a trader said, adding "loading period is not good and the demurrage fee for a VLCC is quite high."

Effective Sept. 1, Canada's Trans Mountain Corporation will accept stricter qualities of heavy crude on its newly expanded pipeline system after some market participants expressed concerns over initial specifications, Commodity Insights reported previously.

The revision in heavy crude quality on TMX pipeline will not have much impact towards Asian buyers, market sources emphasized.

"The TAN quality change is mostly to adapt to West Coast refineries requirements," a trader said, adding that "Asia end-users buy AWB because its cheap, I think it's mostly price driven."