South Korea unwinds crude import diversification strategy as Middle East dependence grows

South Korea is looking to unwind its crude import diversification strategy, at least in 2022, as refiners find taking incremental supplies from major Middle Eastern producers highly efficient in times of tight global supply and surging oil prices, while the country aims to completely phase out Russian crude shipments.

The world's fourth biggest crude importer has been striving to diversify its crude supply sources for more than a decade, with South Korea's reliance on Middle Eastern crude falling from around 87% of its annual total refinery feedstock imports in 2011 to around 70% in 2018, before registering the lowest record annual Persian Gulf import ratio of 60% in 2021, according to S&P Global Commodity Insights calculation based on data from Korea National Oil Corp.

For one of the world's top 10 economies that rely almost 100% of its crude oil requirements on imports, supply diversification remains a crucial energy security strategy for South Korea, considering the volatile nature of global geopolitics, according to market analysts at Korea Petroleum Association.

However, the diversification efforts may need to be put on hold in 2022 as tight global supply and high benchmark oil prices would mean taking additional barrels from top Middle Eastern suppliers more effective than looking for extra cargoes from minor suppliers in Africa, Southeast Asia and Oceania, industry analysts and refinery sources said.

"Many smaller OPEC producers are struggling to lift their output capacity and meet their production quotas, while [South Korean] refiners are looking to completely avoid buying Russian crude ... hence it's much more efficient to rely on traditional top suppliers like Saudi Arabia," said a crude and condensate trading manager at a major South Korean refiner, who declined to be identified due to the sensitive nature of international corporate trading relationships.

South Korea's crude imports from its top supplier Saudi Arabia rose 22.3% year on year to 29.027 million barrels in May, latest data from KNOC showed. Shipments from Kuwait also rose 2.4% year on year to 8.6 million barrels in May, while imports from Iraq rose 44% from a year earlier to 6.9 million barrels and the monthly intake from Qatar jumped 51.1% to 5.04 million barrels.

In the first five months, shipments from Middle Eastern producers accounted for around 65% of South Korea's total refinery feedstock imports of 81.6 million barrels during the period, according to S&P Global calculation based on latest KNOC data.

The Middle Eastern sour crude proportion could potentially edge closer to 70% this year as refiners aim to secure as many incremental Persian Gulf supplies as possible since OPEC+ decided to scale up the group's production for July and August, the KPA analysts and refinery feedstock management sources in Seoul, Daesan and Ulsan said.

"It's still a highly unlikely scenario, but condensate buyers would also rush to take Iranian South Pars if [the Biden administration] decides to lift sanctions against Tehran sometime later in the year... this could see South Korea's dependence on Persian Gulf shipments easily surpass 70%," said a feedstock manager at Hanwha TotalEnergies.

Cost efficiency

Although Middle Eastern crudes are not the most cheapest option for South Korean refiners, logistics and trading economics would still favor taking additional barrels from the top Persian Gulf suppliers than purchasing spot cargoes from various other regions, refinery sources said.

South Korean refiners paid on an average $99.60/b for shipments of Saudi crude over January-May, lower than $105.70/b paid for Nigerian crude during the same period, $111.2/b for North Sea barrels, and $107.70/b for Australian cargoes, KNOC data showed.

US, Russian crude

South Korea would also continue to bring ample supply of light sweet US crude, especially as the country aims to completely phase out Russian oil purchases within the coming months, market participants said.

Crude imports from Russia in May plunged 84.2% from a year earlier to just 703,000 barrels, marking the smallest monthly shipments from the non-OPEC producer since February 2016 when South Korea received 699,000 barrels, the KNOC data showed. For the first five months, imports of Russian crude dropped 32.2% year on year to 16.9 million barrels.

Although there are still some Russian crude supplies tied to quarterly and half-yearly term contracts, South Korea will eventually halt Russian oil purchases as many companies look to avoid trade, logistical, legal and financial complications that could affect corporate reputations, S&P Global reported previously, citing refinery feedstock managers at major South Korean refiners.

Plenty of WTI Midland and Eagle Ford crude imports from the US would comfortably make up for any gaps left by faltering light sweet Far East Russian crude intake, a sweet crude trading manager at a major South Korean refiner said.

Crude imports from the US in May rose 6.5% from a year earlier to 9.9 million barrels, marking the 13th consecutive month of year-on-year increase, the KNOC data showed. For the first five months, imports of US crude jumped 38.3% year on year to 60.6 million barrels.

SOUTH KOREA'S TOP 10 CRUDE SUPPLIERS

(Unit: '000 barrels)

*Includes other suppliers

Source: Korea National Oil Corp.