Chinese refiners weigh between Iraqi Basrah Medium crude's price discount, quality issues

Singapore — China is fast becoming Iraq's most important customer of its Basrah Medium crude, with several refineries growing fond on the new medium sour grade amid tight Saudi crude supply and attractive Iraqi selling prices, but it may take a while to gain wider acceptance in the Chinese refining sector as quality issues persist.

Iraq firmly held the three-largest crude supplier status in China in February, as the giant Asian consumer received 5.78 million mt in the month, up 31.4% from a year earlier, latest data from General Administration of Customs showed.

China has been the largest buyer of the new Iraqi Basrah Medium crude that was first sold in the international market in January, accounting for almost half of total Basrah Medium exports to date. The Basrah Medium grade had shipments of 1 million b/d in February, or 35% of the total Gulf terminals exports, up from 32% in January, according to data from Iraq's State Oil Marketing Organization, or SOMO.

Basrah Medium crude's competitive official selling price is appealing to some of China's private-sector refiners that are often more sensitive to feedstock costs than their state-run counterparts.

Independent refiner Hengli Petrochemical (Dalian) received its first Basrah Medium cargo in Changxing Island on March 29, according to a company source with direct knowledge of the matter. This cargo was the first Basrah Medium cargo received by a private-sector Chinese refiner.

Hengli is a regular buyer of Iraqi and other Middle Eastern medium and heavy sour grades. It received 7.16 million mt of Iraq's Basrah Light and Basrah Heavy crudes in 2020, accounting for 28% of its total feedstock imports in the year, according to S&P Global Platts data.

"The [new Basrah Medium] grade is quite similar to Basrah Light [and other Persian Gulf medium-heavy sour grades], but cheaper, a company source said.

SOMO set the official selling price for Basrah Medium crude loading in April and bound for Asian customers at a premium of 10 cents/b to the average of Platts Dubai and Platts Oman crude assessments in the month of loading, well below the premium of $1.30/b set for Basrah Light for the month.

The Basrah Medium April OSP was also cheaper than other major Middle Eastern medium and heavy source crude prices. Saudi Aramco has put a price tag on its Arab Medium crude for loading in April at Platts Dubai/Oman plus 95 cents/b and Arab Heavy crude at a premium of 30 cents/b.

Saudi crude alternative

Many Chinese refineries will likely continue to embrace Basrah Medium as an alternative feedstock to cover any shortage of Saudi crude supplies as the OPEC kingpin maintains strong discipline over production levels.

State-run Norinco's 6 million mt/year Huajin refinery will receive 1 million barrels of Basrah Medium in May, according to a source with direct knowledge of the deal.

Due to OPEC's production cut strategy and monthly term crude allocation cuts by Saudi Aramco to buyers in Asia, regular buyers of Arab Medium crude in China cannot get enough supply, so they are purchasing more Basrah Medium that shares similar qualities, the source told Platts.

State-run Sinopec's refineries along the eastern coastline including Tianjin Petrochemical and Maoming Petrochemical, as well as Sinochem's Quanzhou refinery, also said they remain keen to regularly import Basrah Medium as Saudi Arabia keeps a lid on supplies.

PetroChina, Shandong refiners not keen

However, not all Chinese refineries are fond of the new Iraqi crude grade, as quality issues outweighed the benefit of its lower OSP for various state-run and private-sector plants.

One PetroChina refinery in south China exchanged its Basrah Medium cargo for a Basrah Light tanker with an unidentified counterparty in China in March as the new Iraqi grade was not suitable for the plant's main distillation and cracking units.

"We don't have a coker, which makes it difficult to treat those crudes with very high sulfur content [like Basrah Medium]," a source with the refinery said.

Industry sources noted that Basrah Medium's higher arsenic, salt, metal, sulfur and residual contents must be considered when calculating the grade's OSP discount to other medium and heavy sour grades.

Besides Hengli, small-scale independent refineries in Shandong province have not been heard to have purchased any Basrah Medium cargoes, due mainly to its poor quality, according to feedstock trading sources in the private-sector refining industry.

The cost of desulfurization is too high, essentially offsetting Basrah Medium's OSP discount to other grades and not making it an ideal feedstock choice, the trade sources said.