Growing Brazil-China crude trade to boost VLCC demand
Petrobras’s Buzois crude grade began production in April, with output set to hit around 65,000 barrels per day (bpd) by year-end and 750,000 bpd in 2021, by which time the number of platforms allocated will have risen to five from one currently. Brazil is also increasing production from its Mero and Lula crude fields.
“Over the next three to four years we are going to see strong crude supply growth from Brazil,” Ash Singh, an oil market analyst at IHS Markit, told Fairplay, “The Brazilian market is fairly balanced right now, so they need an international export market. That market is China.”
Even before the new Brazilian production comes online, 2018 has seen Brazil become China’s fourth largest crude supplier after Russia, Saudi Arabia, and Angola, and slightly ahead of Iran, with 732,000 bpd exported to the country in March 2018, data from IHS Markit shows. This compares to 615,000 bpd in the same period last year when it was China’s sixth largest crude supplier.
Expanding shale production levels mean the United States is also seeking larger export markets, and already has significant crude sales to China. But with trade tensions between the two economic giants growing – and despite the Chinese recently dropping tarriffs against US crude – China is looking to diversity their sources away from the US, a development that is taking place just as Brazilian production is increasing.
That is giving Petrobras the perfect opportunity to grab market share. “For Brazil and China, this is a mutually beneficial relationship,” Singh said.
Protrobras told Fairplay that it was looking to increase its oil export levels, and that China was the company's main oil buyer. It is even hiring mandarin-speaking staff to step up its marketing efforts to the country.
“In order to improve market share in China, considering the entry of the teapots in the international market, Petrobras considers that it is necessary to have on its team, which are professionally fluent in Mandarin, for the specific development of this market,” it said, referencing the small independent 'teapot' refineries that import about 15% of China's crude.
At around 30 degrees API and 0.2% sulphur, the new Buzois grade is a relatively light and sweet crude, making it an excellent replacement for domestic Chinese crude grades whose production has recently been in decline.
“It is also similar in make-up to US crudes, so Chinese refineries are already designed to handle Buzois and it can be processed by Chinese teapot refineries that are not very sophisticated,” Singh said.
As a low-sulphur crude, Buzios also tallies with China’s goal of tightening environmental standards and reducing air pollution.
Assuming a loading port of Santos and a destination of Dailan, data from IHS Markit shows that if the entire 750,000 bpd is transported to China, it would result in 137 additional VLCC journeys per year, roughly 2.6 a week. At a journey time of 47.5 days, that would see VLCC employment rise by over 6,500 days per year, with an increase in tonne-mile demand of 3.4 billion.
However, if that crude were to be supplied from the US, the journey from Huston to Dalian via Singapore would have contributed 4.3 billion tonne-miles and VLCC employment would have risen by 8,220 days per year, demonstrating how US-China trade tensions are beginning to impact the VLCC market.
Currently, the only threat to increasing Brazilian crude sales to China appear to be from each country’s respective domestic policies.
Brazil’s overall crude exports dipped sharply to 667,000 bpd in June, Argus Media reported, as Petrobras switched some of its supply to domestic refineries as part of a government commitment to subsidise diesel prices to end a trucker strike that was gripping the country. This saw crude exports to China fall in value by 34%.
Shipments to China rebounded strongly in July to 1.8 million bpd – a record high – but the episode highlights a level of uncertainty surrounding the country’s exports.
On the Chinese side, broker Bancosta noted that Beijing has closed several loopholes that had enabled the small teapot refineries to avoid consumption tax and undercut state-owned refineries in the crude product market. Margins in the sector have fallen, while credit conditions have been tightened.
With over half of Brazilian crude exports to China going to teapot refineries, falling demand from this sector could hurt Brazilian exports to the country, although probably only in the short-term.