asian premium of crude oil - keei · 2 contents? crude oil pricing formula? price differential...

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Young-Young-SeokSeok Moon MoonSenior Research Fellow, KEEISenior Research Fellow, KEEI

Dal-SokDal-Sok Lee LeeResearch Fellow, KEEIResearch Fellow, KEEI

Asian Premium of Crude OilAsian Premium of Crude Oil

International Workshop onInternational Workshop on‘‘Cooperative Measures in NortheastCooperative Measures in Northeast

Asian Petroleum SectorAsian Petroleum Sector’’September 6, 2003, Seoul, KoreaSeptember 6, 2003, Seoul, Korea

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ContentsContents

?? Crude Oil Pricing Crude Oil Pricing Formula Formula

?? Price Differential between East and West Price Differential between East and West

?? Causes of Asian Premium Causes of Asian Premium

?? Review of Pricing Mechanism Review of Pricing Mechanism

?? Proposal for Pricing Change Proposal for Pricing Change

?? Long-term Counter Measures Long-term Counter Measures

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Crude Oil Pricing FormulaCrude Oil Pricing Formula Pricing Formula by DestinationPricing Formula by Destination

•• PijPij = = PmjPmj ±± AijAij - - P; Crude Price, Pm; Marker Price, A; Adjustment FactorP; Crude Price, Pm; Marker Price, A; Adjustment Factor i; Crude i, j; Destination i; Crude i, j; Destination

FOB30 Days(MonthlyAverage)Loading DateDubai/Oman Asia

FOB/C&F5-10 Days50 Days afterLoadingWTI U.S.A.

FOB/C&F5-10 Days40 Days afterLoading

Brent(B-wave) Europe

Point ofSalePeriod of PricingPrice TimingMarker PriceDestination

4

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1995 1996 1997 1998 1999 2000 2001 2002

$ / bbl

Price Differential between East and WestPrice Differential between East and West Price Differential of A/LPrice Differential of A/L

•• To Asia To Asia –– To Europe To Europe

5

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1995 1996 1997 1998 1999 2000 2001 2002

$ /bbl

•• To AsiaTo Asia –– To U.S. To U.S.


6

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1995 1996 1997 1998 1999 2000 2001 2002

$ /bb l

•• To U.S. To U.S. –– To Europe To Europe


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To USA - To Europe

To Asia - To USA

To Asia - To Europe

0.060.961.021995

-0.091.211.111995-20020.021.751.782002-1.782.670.8920010.350.580.932000-0.101.201.1019990.361.061.4219980.221.361.5819970.110.090.201996

•• Relatively Higher by $1.0 -$1.5/B on Average for Asian MarketRelatively Higher by $1.0 -$1.5/B on Average for Asian Market

( $/barrel )( $/barrel )


8

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1995 1996 1997 1998 1999 2000 2001 2002

M arker Price Diffe rence Adju stment Factor Diffe re nce Price Difference

$ /bbl

Price Differential between East and WestPrice Differential between East and West Breakdown of Formula Price DifferentialBreakdown of Formula Price Differential

•• To AsiaTo Asia –– To Europe To Europe

9

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1995 1996 1997 1998 1999 2000 2001 2002

M arker P ric e Diffe rence Adju stment Factor Difference Pric e Difference

$ /bbl


•• To AsiaTo Asia –– To U.S. To U.S.

10

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1995 1996 1997 1998 1999 2000 2001 2002

M arker P ric e Difference Adju stment Factor Difference Pric e Difference

$ /bbl


•• To U.S. To U.S. –– To Europe To Europe

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•• $2.5 $2.5 –– 3.7billion Crude Oil Import Cost Increase in NEA Countries 3.7billion Crude Oil Import Cost Increase in NEA Countries - - Middle East Crude Oil Imports; 6.8mb/d(2001)Middle East Crude Oil Imports; 6.8mb/d(2001)

•• Cost Increase of Other Energy SourcesCost Increase of Other Energy Sources - LNG Import Prices- LNG Import Prices - Coal Import Prices- Coal Import Prices

Price Differential between East and WestPrice Differential between East and West Additional Burden for Energy ProcurementAdditional Burden for Energy Procurement

•• Undermining NEA countriesUndermining NEA countries’’ International Competitiveness International Competitiveness

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•• JapanJapan’’s LNG Import Prices $0.5 - $1.5/mmbtu Higher than Spains LNG Import Prices $0.5 - $1.5/mmbtu Higher than Spain’’ss

0.00

1.00

2.00

3.00

4.00

5.00

6.00

94 95 96 97 98 99 2000 2001 2002

Spain LNG

Japan LNGIEA Europe Crude Oil

Russia-France PNG

NW EuropeSpot LSFO

Japan LNG – Spain LNG

Note: Crude Oil Calorific Value: 5.75 mmbtu/bblSource: IEA, Energy Prices & Taxes/ World Gas Intelligence

UNIT : US $/MMBTU

Price Differential between East and WestPrice Differential between East and West Additional Burden for Energy ProcurementAdditional Burden for Energy Procurement

13

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

80 %

90 %

100 %

U. S . W . E u r o p e N E A s i a T ota l W o r l d

A m e r i c a E u r o p e M id d l e E a s t Afr i c a A s a- P a c ifi c N o n I d e ntifi e d

•• Heavy Dependency on Middle East Crude Oil in Asian MarketHeavy Dependency on Middle East Crude Oil in Asian Market

Causes of Asian PremiumCauses of Asian Premium Limited Crude Oil Import Sources in AsiaLimited Crude Oil Import Sources in Asia

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•• Low Liquidity and Transparency in Spot Price Formation of DubaiLow Liquidity and Transparency in Spot Price Formation of Dubai - Production Decline in Dubai, Marker Crude for Asia - Production Decline in Dubai, Marker Crude for Asia

0

50

100

150

200

250

300

350

400

450

1992 1994 1996 1998 2000 2002

Thousand b/ d

Causes of Asian PremiumCauses of Asian Premium Absence of Representative ME Crude MarketAbsence of Representative ME Crude Market

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•• Inflexible Supply System imposed by Persian Gulf ProducersInflexible Supply System imposed by Persian Gulf Producers - - Destination RestrictionDestination Restriction -- Third-Party Trading ControlThird-Party Trading Control

•• Inefficient Arbitrage between East and West due to Inflexible SupplyInefficient Arbitrage between East and West due to Inflexible Supply - - Unresponsive Oil Flow to Shifts in Relative Price of Brent and DubaiUnresponsive Oil Flow to Shifts in Relative Price of Brent and Dubai

•• Discrimination between Eastern and Western Market, ChargingDiscrimination between Eastern and Western Market, Charging Asian Premium Asian Premium

Causes of Asian PremiumCauses of Asian Premium Inflexible Supply of ME Crude OilInflexible Supply of ME Crude Oil

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Review of Pricing MechanismReview of Pricing Mechanism Marker Price FormationMarker Price Formation

•• Marker Crude Spot Price Differential ; Relatively Unstable PriceMarker Crude Spot Price Differential ; Relatively Unstable Price Formation of Dubai Formation of Dubai

Note: 12 Month Moving AverageNote: 12 Month Moving Average

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1995 1996 1997 1998 1999 2000 2001 2002

B r e nt-D u b a i W T I-D u b a i W TI- B r e n t

$ /bbl

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Review of Pricing MechanismReview of Pricing Mechanism Marker Price FormationMarker Price Formation

•• Brent-Dubai NBV Differential and Its Spot Price Differential ;Brent-Dubai NBV Differential and Its Spot Price Differential ; Unusual Movement of Spot Price Differential during 1996-1998 Unusual Movement of Spot Price Differential during 1996-1998


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1995 1996 1997 1998 1999 2000 2001 2002

R ott e r d a m N B V U S G u lf N B V S p ot P r i c e

$ / bbl

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•• A/L Adjustment Factor in European Market Reflecting the DifferenceA/L Adjustment Factor in European Market Reflecting the Difference of Brent - A/L NBV (Quality Difference and Transportation Costs)of Brent - A/L NBV (Quality Difference and Transportation Costs)

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1995 1996 1997 1998 1999 2000 2001 2 002

Q u a l ity D iff e r e n c e & T r a n s p o rt a t i o n C o s t A d j u s tm e n t F a c to r

$ / bbl

Review of Pricing MechanismReview of Pricing Mechanism Adjustment Factor (Europe)Adjustment Factor (Europe)


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-7.0

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

1995 1996 1997 1998 1999 2000 2001 2002

Q u a l it y D iff e r e n c e & T r a n s p o rt a t i o n C o s t A d j u s tm e n t F a c to r

$ / bbl

Review of Pricing MechanismReview of Pricing Mechanism Adjustment Factor (U.S.)Adjustment Factor (U.S.)

•• A/L Adjustment Factor in U.S. Market Reflecting the DifferenceA/L Adjustment Factor in U.S. Market Reflecting the Difference of WTI - A/L NBV (Quality Difference and Transportation Costs)of WTI - A/L NBV (Quality Difference and Transportation Costs)


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Review of Pricing MechanismReview of Pricing Mechanism Adjustment Factor (Asia)Adjustment Factor (Asia)•• A/L Adjustment Factor in Asian Market Reflecting the DifferenceA/L Adjustment Factor in Asian Market Reflecting the Difference of Dubai - A/L Quality Difference Onlyof Dubai - A/L Quality Difference Only

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1995 1996 1997 1998 1999 2000 2001 2002

Q u a l ty D iffe r e n c e A d j u s tm e nt F a cto r

$ / bbl


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•• Criteria for Marker Crude include Volume, Security of Supply,Criteria for Marker Crude include Volume, Security of Supply, Diversity of Sellers, Broad AcceptanceDiversity of Sellers, Broad Acceptance

? High Liquidity andTransparency? Reflecting European Demand and Supply? Low Sulfur Light Crude Oil? Expected Production Decline? Easy to Identify ‘Asian Premium’

? Active Spot Trading? Representing Middle East Crude Oil? High Equity Share by R/D Shell? Expected Production Decline? Difficult to Identify ‘Asian Premium’

BRENTOMAN

Proposal for Pricing ChangeProposal for Pricing Change Alternative of Marker Crude for AsiaAlternative of Marker Crude for Asia

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•• Adjustment FactorAdjustment Factor - Quality Difference Compared with Brent at Asian Market (Singapore)- Quality Difference Compared with Brent at Asian Market (Singapore) - Transportation Cost from Middle East to Northeast Asia- Transportation Cost from Middle East to Northeast Asia

•• Marker PriceMarker Price - IPE Brent (B-wave)- IPE Brent (B-wave)

Proposal for Pricing ChangeProposal for Pricing Change Pricing Based on Brent (Alternative Marker)Pricing Based on Brent (Alternative Marker)

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•• Estimation of A/L Adjustment Factor at Asian MarketEstimation of A/L Adjustment Factor at Asian Market

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

1995 1996 1997 1998 1999 2000 2001 2002

A s i a ( E s tim ati o n ) E u r o p e ( A c t u a l )

$ / bbl

Proposal for Pricing ChangeProposal for Pricing Change Pricing Based on Brent (Alternative Marker)Pricing Based on Brent (Alternative Marker)

24

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1995 1996 1997 1998 1999 2000 2001 2002

$ / bb l

Proposal for Pricing ChangeProposal for Pricing Change Simulation by Pricing ChangeSimulation by Pricing Change•• Price Differential of A/L between AsiaPrice Differential of A/L between Asia––Bound and Europe-BoundBound and Europe-Bound

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•• Activating International Oil Product Trading to Curb Price DiscriminationActivating International Oil Product Trading to Curb Price Discrimination - Linkage of Asian Market and Europe/ U.S. Market- Linkage of Asian Market and Europe/ U.S. Market - Linkage of Crude Oil Market and Oil Product Market- Linkage of Crude Oil Market and Oil Product Market

Long-term Counter MeasuresLong-term Counter Measures StrengtheningStrengthening Asian Oil Product MarketAsian Oil Product Market

•• Introducing Spot Markets and Futures Market in NEA RegionIntroducing Spot Markets and Futures Market in NEA Region - Deregulation of NEA countries- Deregulation of NEA countries’’ Domestic Market Domestic Market - Joint Investigation for Oil Product FTA among NEA Countries- Joint Investigation for Oil Product FTA among NEA Countries

•• Reduction of Oil Product Import Tariffs in NEA CountriesReduction of Oil Product Import Tariffs in NEA Countries

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•• Lack of Independent Storage Facilities in Asian Region Lack of Independent Storage Facilities in Asian Region - Singapore: 16.4million barrels - Singapore: 16.4million barrels - ARA: 49.6million barrels - ARA: 49.6million barrels - U.S. Gulf: 65.3million barrels - U.S. Gulf: 65.3million barrels

Long-term Counter MeasuresLong-term Counter Measures Expanding Oil Stockpile in NEA RegionExpanding Oil Stockpile in NEA Region

•• Expansion of Crude Oil Stock by Increasing Government FacilitiesExpansion of Crude Oil Stock by Increasing Government Facilities

•• Joint Stockpile with Crude Oil Producing CountriesJoint Stockpile with Crude Oil Producing Countries

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•• Crude Oil Procurement from Potential Supply AreaCrude Oil Procurement from Potential Supply Area - East Siberia and Far East Russia- East Siberia and Far East Russia - Central Asia and Caspian Sea- Central Asia and Caspian Sea - Chinese Offshore - Chinese Offshore

Long-term Counter MeasuresLong-term Counter Measures Reducing Middle East Oil DependencyReducing Middle East Oil Dependency

•• Cooperation on E & P Activities among NEA countriesCooperation on E & P Activities among NEA countries - Concentrated Investment for the Strategic Area- Concentrated Investment for the Strategic Area

asian premium of crude oil - keei · 2 contents? crude oil pricing formula? price differential...

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