South Korean refiners assess Canadian crude import economics post-TMX expansion

South Korean refiners are evaluating the import and refining economics of Canadian crude following the recent expansion of the Trans Mountain Expansion pipeline, but the Asian end-users' preference for more lighter crude may keep the Vancouver-South Korea trade flows limited for now, refinery and trade sources said June 7-12.

South Korea used to regularly import parcels of heavy sour Canadian crude during 2021-2022, but Asia's third biggest crude importer has not purchased any Canadian cargoes since September 2022, the latest state-run Korea National Oil Corp. data showed.

Availability of Canadian crude from Vancouver for export to the Northeast Asia via the Pacific Ocean will likely grow significantly, but it remains challenging to determine heavy sour Canadian crude would regularly fit into the latest refinery linear programming models in South Korea, a feedstock manager and officials at major South Korean refiners said.

Canada's long-awaited 590,000 b/d TMX pipeline started commercial service May 1, providing an opportunity for Canadian producers to export their crude from Vancouver to the international market. Flows of heavier Western Canada crudes like Western Canada Select and Cold Lake are increasingly shifting away from the Midcontinent into Western Canada and toward Asia and California, S&P Global Commodity Insights reported previously.

However, South Korean refiners said they much prefer more availability of lighter Canadian crude from Vancouver as their latest refining strategy is to maximize output of middle distillates and high-end fuels from lighter-end crude grades.

The expansion of Trans Mountain's 350,000 b/d pipeline from Alberta's oil producing areas to the port of Burnaby in British Columbia started up on May 1.

The initial pipeline -- Line 1 -- carried mostly light crude, some heavy crude and refined products, while the Trans Mountain Expansion -- the 590,000 b/d Line 2 -- will carry mostly heavy crude, forecast by Commodity Insight analysts to be about 460,000 b/d.

Highly sophisticated South Korean refineries are more than capable of cracking any types of crude grades. Regardless of the API gravity, sulfur content and other contaminants, state-of-the-art South Korean refinery systems can process any types of crude with extremely high efficiency, industry sources said.

However, recent strategy focuses on maximizing the use of more lighter crude grades from North America, leaving limited room for heavy Canadian grades in the system, feedstock sources and officials at major South Korean refiners said. The sources declined to be identified due to the sensitive nature of specific refining and crude slate strategy.

Cold Lake Blend has a gravity of around 21 API and sulfur content of around 3.75%, while WCS has a gravity of around 20 API and sulfur content of around 3.72%.

Northeast Asian outlets

South Korea is highly unlikely to import heavy sour Canadian crude in large volumes in 2024, but light sweet US crude shipments would continue to flourish, refinery and feedstock sources said.

South Korea took 12.37 million barrels of mostly light sweet WTI Midland crude from the US in April, up 13.8% from a year earlier, KNOC data showed. Asia's biggest US crude buyer imported 52.5 million barrels in the first four months, 11.8% higher year on year.

"[Northeastern Asian] outlets for Canadian heavy sour crude from Vancouver could be limited to China, South Korea and perhaps Japan for now.... China will obviously take the most from Vancouver and South Korea might take odd few cargoes," said a trader at a European trading house based in Singapore with close knowledge of regular North America-Asia trade flows.

"Japanese refiners might take a look but they are not that keen," the trader added.

Delivery of heavy waxy Canadian crudes costs more than light sweet US crude in winter as the oil needs to be kept heated during the Asia-bound voyage, according to a feedstock management source at a Japanese refiner that previously purchased Cold Lake crude.

China's state-run Sinochem took more than one cargo of Canadian Access Western Blend (AWB) via the TMX to its three refineries in Shandong province, a source with knowledge of the matter said. The first cargo carrying 550,000 barrels loaded via Dubai Angel is due to arrive at Longkou port at around June 13, according to Commodities at Sea. The cargo will likely be discharged for its Huaxing Petrochemical, according to the source.

In additional to Sinochem, market sources said PetroChina, a shareholder in TMX, could also take as many as 2-3 Aframax cargoes monthly. Its Guangxi Petrochemical is likely to take its first cargo of 550,000 barrels in early July.

Platts, part of Commodity Insights, assessed Cold Lake at Hardisty at WTI calendar month average minus $13.1/b and Western Canadian Select at WTI CMA minus $12.95/b June 11.