Singapore — South Korea has gained full membership of the Organization for Cooperation between Railways, or OSJD, after North Korea voted in favor of its southern neighbor, a move that could grant South Korean refiners much cheaper access to central Asian crude grades such as Kazakhstan’s CPC Blend.
CPC Blend crude has traditionally been priced below lighter-end Middle Eastern crude grades, but the cost of bringing the Central Asian oil to Northeast Asia far outweighed that for Persian Gulf barrels.
S&P Global Platts had assessed CPC Blend for loading from Novorossiysk marine terminal in the Black Sea at an average outright price of $69.45/b so far this year, while Murban’s year-to-date average outright assessment was $71.34/b, placing the light sweet Kazakh crude at an average discount of $1.89/b to the light sour Abu Dhabi grade on an FOB basis.
However, final import costs which include freight, insurance and other administrative and port charges showed a completely different picture.
South Korea has imported a total of 19.38 million barrels of crude oil from Kazakhstan over the first five months, costing on average $70.26/b, according to data from Korea National Oil Corp.
In comparison, 53.22 million barrels imported from Iraq during the same period cost $62.87/b on average, while 28.99 million barrels brought from the UAE during January-May cost an average of $69.55/b, KNOC data showed.
Logistics has often been the biggest hassle for South Korean refiners importing the light sweet Kazakh crude as the barrels are required to travel over 1,500km by the Tengiz-Black Sea pipeline before sailing through numerous maritime routes including the Black Sea, the Mediterranean, the Red Sea, the Indian Ocean and the South China Sea before reaching South Korean ports.
The potential opening of land transportation route through North Korea and the subsequent access to the trans-Eurasian railway network could provide a cheaper and much shorter delivery option to bringing in crude oil from Kazakhstan, industry sources based in Seoul said.
Several refinery sources indicated that the total pipeline and railway travel distance from the CPC Blend’s Tengiz oilfield in the West of Kazakhstan to Ulsan refinery complex in South Korea would be around 5,000 km, whereas the cumulative distance for the traditional import route that involves the CPC pipeline and sea voyages is at least three to four times longer.
At an OSJD ministerial conference in Kyrgyzstan on June 5, representatives of ministries from 28 member nations including Kazakhstan, Russia, Ukraine, Iran, China and North Korea have unanimously approved South Korea’s official membership, the South Korean Ministry of Land, Infrastructure and Transport said.
The official membership allows every member state to offer each other priorities in all logistical procedures, hence the Eurasian railway network would significantly raise South Korea’s trading volumes with the West and Central Asia going forward, the MOLIT said in a press release.
South Korea’s imports of Kazakhstan’s light CPC Blend crude soared more than six fold from the same time a year ago to 6.41 million barrels in May, KNOC data showed.
South Korean refiners have been raising their CPC Blend intakes as the companies face many hurdles securing Iranian crude and condensate in the wake of the US’ re-imposition of sanctions on Iran.
COST CUTS
SK Innovation, South Korea’s biggest importer of CPC Blend crude, said it would increase its purchase of the Kazakh grade if transportation costs became more favorable thanks to railway links.
“We will check costs and other conditions closely if and when the railway routes become available,” a company official said.
With cost of bringing in Kazakh crude often stretching $1/b-$8/b more than Middle Eastern supplies, South Korean refinery sources said they were hopeful the potential access to the trans-Eurasian railway network could trim logistical costs by at least 50 cents/b.
Industry sources pointed out that Kazkah crude could reach Xinjiang in far western China via the Atasu-Alashankou oil pipeline operated by KazTransOil JSC and China National Oil and Gas Exploration and Development Corp.
The barrels could then travel via Chinese rail network connecting Xingjiang to Dandong near the North Korean border, before heading to Ulsan via Sinuiju in North Korea and Seoul.
Another option could be sending the oil to Far East Russia’s Vladivostok by linking with the trans-Siberian railway, before redirecting to South Korea through Tumangang in North Korea’s border town with Russia.
During the high-level talks held in the truce village of Panmunjom last month, the two Koreas agreed to push for reconnection of railways and roads between the two neighbors and other cross-border economic projects.
South Korea’s Ministry of Land, Infrastructure and Transport said it has already started drawing up plans to upgrade the Kyung-Eui railway which would connect Seoul and North Korea’s Sinuiju located near the northwestern border with China.
— Gawoon Philip Vahn, [email protected]
— Charles Lee, [email protected]
— Edited by Norazlina Jumaat, [email protected]
Source: S&P Global Platts
