Priced out by Russian oil, African producers find new customers post-war

Struggling West African crude producers, including heavyweights Nigeria and Angola, have been forced to find new markets for their oil since the Ukraine war, with the Chinese and Indian refiners on whom they once relied now hooked on cheap Russian crude, data from S&P Global Commodities at Sea shows.

As shipments of West African crude to Asia have slumped since 2020, when the COVID-19 pandemic dented demand, exports to Europe and the US have steadily risen, with refiners in those markets shunning Russia's Urals crude.

"Our oil has actually gone to Europe," said Knut Sæthre, chief financial officer of London-listed minnow BW Energy, which has production assets in Gabon, in an interview with S&P Global Commodity Insights. "There might be less [African] oil now going to China and India, since they are buying a lot of that Russian oil. But of course then there are European buyers that need to replace that Russian oil with let's say more African oil."

However, traders who have struggled to offload West African barrels in recent months said increased exports to Europe did not reflect a reordering of the sector but rather increased volumes having to attract interest from an oil-saturated European market, suggesting a fairly gloomy outlook for African producers, which have also faced production slumps.

Cheap Russian barrels

Chinese refiners, traditionally the biggest customers for crude from Angola and the Republic of Congo, have been lured by Russia's cheaper grades, kept low by the $60/b price cap imposed by Western countries, even though Russian oil is medium gravity and sour, while West African crude is mostly light and sweet.

Russia has already become the top crude supplier to China and India in the past year, with exports to Asia soaring from 1.33 million b/d in 2021 to 2.11 million b/d in 2022 and 3.23 million b/d on average this year.

Meanwhile, the quantity of West African oil heading to Asian countries has nosedived since 2020, with the biggest plunge coming since the Ukraine war. Those exports exceeded 2.3 million b/d in 2020, but fell to 2.06 million b/d in 2021 and 1.66 million b/d last year. In 2023, the region is averaging just 1.53 million b/d in exports to Asia, according to data from CAS.

As a result, West African crude as a share of total Chinese oil imports has also fallen, from 14% in 2020 to 9% in the first quarter of 2023, the data shows.

African producers were always likely to be displaced by cheaper Russian crude because most of their crude is sold on the spot market, unlike Middle Eastern producers who rely on long-term contracts. As a result, oversupply, marketing problems and price dips are perennial challenges. However, sluggish exports to Asia have come even as dips in Brent crude prices narrowed the spread between Brent-pegged West African crude and Middle Eastern grades. In March, the Brent/Dubai exchange of futures for swaps slipped below $2/b, the narrowest since March 2021. That would ordinarily boost demand for West African barrels, but they continued to be undercut by cheaper Russian ones.

Gloomy outlook

Given the high diesel-yielding qualities of West African crudes, they have found other buyers.

Dutch imports of West African oil increased from 144,600 b/d in 2021 to 264,100 b/d in 2022 and 426,300 b/d on average this year. British and French appetite for West African crude has also strengthened considerably, while exports to the US have more than doubled since 2021 to 211,000 b/d on average this year.

However, traders disputed suggestions that European demand for African crude has strengthened significantly. Instead, sellers have been forced to aim West African crude towards European refiners, which tend to bite when prices dip low enough. In recent months they have struggled to drum up interest in Nigerian crude, with French refinery strikes worsening the backlog.

"We're currently struggling with unsold barrels," said one West African trader, cheering a recent force majeure on liftings at Nigerian export terminals run by ExxonMobil.

With Angola and Republic of Congo heavily reliant on Asian demand, the value of the latter's Djeno grade, long beloved by Chinese refiners, has slipped $3.55/b against Dated Brent since before the war, according to Platts, a unit of S&P Global Commodity Insights.

Trading sources said Chinese demand for West African crude should pick up later in 2023 as the country emerges from its coronavirus-induced slumber.

"Feels like Chinese buying has posted larger gains as we go through 2023," said one. However, Indian appetite for Nigerian crude is not expected to turn around this year.

Falling Asian demand is the latest blow to West African producers, which have also seen exports hit by low production. Angolan output has fallen in the past five years due to technical problems at aging wells and low upstream investment. In March, the OPEC member's production fell to a 19-year low of less than 1 million b/d. Nigeria has also seen production fall well short of its 1.77 million b/d OPEC quota as a result of technical issues and rampant insecurity and oil theft in the Niger Delta.