SAUDI ARABIA - Focus On East Of Suez Markets.

With the exception of OECD Pacific states, oil in east of Suez markets is still not heavily taxed. The benefits of relatively cheap crudes or oil products reaching these markets are felt quickly by the consumers. This is unlike the situation in the OECD region, where governments tax away any major fall in oil prices, be that for revenue or for environmental reasons.

In the US, the Bush administration has since early 2001 resisted repeated demands to to impose a special tax on gasoline in an effort to curb a rapid rise in consumption and as a boost to finance Iraq's reconstruction. Taxes on oil products in the US are way lower than those in Europe or the OECD Pacific.

Saudi Aramco's long-term plan to expand its market shares east of Suez is offset somewhat by the short-term pricing measures of its international sales unit. Two of these measures have had negative effects on Saudi Aramco's long-term marketing objectives:

1. The pricing of LPG under the CP formula, based on monthly spot sales tenders which Saudi Aramco has introduced since Oct. 1, 1994, at times has made its butane and propane prices higher than spot market prices. As a result, several term clients have cancelled their Saudi contracts or lowered liftings. The CP approach has discouraged major trading companies which have long promoted the use of LPG by power plants and the petrochemical industry in Japan and other Asian countries (see Vol. 57, Gas Market Trends No. 18). As a result, demand for LPG in Japan and some other Asian countries has declined or its growth has slowed.

2. Saudi Aramco's cuts in medium/heavy crude supplies have badly affected clients on both sides of Suez, while the premia for light/sweet crudes have risen sharply. Some of Saudi Aramco's term clients in the east of Suez occasionally become short of sour grades. This is when price differentials between sweet and sour crudes in Asia narrow.

Becoming part of the eastern economic framework will have major implications for Saudi Aramco and other Middle East oil and gas exporters in the coming years. Oil demand in the east of Suez has begun to rise considerably since 2003, and more so since 2004 when China's and India's economies have been growing rapidly. Asia would become by far the biggest oil market in the world during this decade. A deep recession in Asia, however, will have very negative effects on the Middle East.

The white end of the barrel, represented by gasoline-rich Brent and WTI, will remain the marker for all crudes in the near future. Pricing on both sides of Suez will remain based largely on Western market fundamentals in the next few years, unless a more credible spot market for sweet and sour crudes is established in Asia.

Both the east of Suez fundamentals and the black end of the barrel (representing sour crudes, such as the Arab Light/Heavy grades) are still largely ignored by Western futures markets. It is in these Western markets that price discovery is concentrated, while OPEC states refuse to allow their crudes to trade on grounds that they need to control their destinations.

The fundamentals of eastern markets will only be recognised after an oil price shock has occurred. The shock will come from the black end of the barrel, years after Iraq's oil output has been raise to more than 6m b/d.

       MAJOR GULF SOUR CRUDES, DISTILLATION DATA*

                   Crude Oil  Gas      Lt.Dist.  M.D.   3000"
Crude Oil           SG 60[degrees]    FC1-C4   C5-185[degrees]C  185[degrees]+  Fuel Oil
Arabian Light       0.858       1        21       33      45
Iranian Light       0.857       2        21       30      47
Kuwait              0.870       2        19       20      59
Arabian Heavy       0.887       2        16        9      73
Iranian Heavy       0.871       2        20       22      56

*Yields are % weights; middle distillate is 185[degrees] C to 3000" fuel oil. Fuel oils' sulphur contents are: 3.2% in the yield of AL, 2.4% in Iranian Light's, 4% in Kuwait's, 3.9% in AH's and 2.5% in Iranian Heavy's. (North Sea Forties sweet crude has these distillation data: 0.842% SG 60[degrees] F, 3% C1 to C4, 23% light distillates, 40% middle distillates, and 34% 3000" fuel oil with 0.7% S).

The Arab Super Light (ASL) crude, now produced at the rate of 200,000 b/d from the Najd fields (Unayzah reservoir) south of Riyadh, is a very sweet grade which Saudi Aramco is marketing in the east of Suez. ASL is 50[degrees] API with 0.06% sulphur. ASL is specified as a condensate and thus excluded from OPEC production quotas.

Saudi Aramco moves quantities ASL to S-Oil Corp (ex-Ssangyong) of South Korea, in which the company has a major stake. The other two South Korean refiners, Hyundai and Yukong, take smaller volumes of ASL. Saudi Aramco also sells ASL to Taiyo of Japan. Quantities of ASL are being sold in Europe.

The Saudi Logistics: Saudi Aramco has an integrated overseas system for the shipping, storage and supply of crude oils, refined petroleum products and gas liquids. In terms of tonnage, its shipping subsidiary Vela International has the world's biggest fleet of tankers which carry or store crudes, oil products and gas liquids.

Saudi Aramco has extensive oil storage facilities both in the kingdom and overseas. Together with VLCCs and ULCCs chartered by Vela occasionally for floating stocks, its network can store large volumes of oil worldwide. This includes leased overland storage facilities in Europe, the US, the Caribbean and the Asian/Pacific basin.

The logistical capability also includes facilities purchased, or bought into, by Saudi Aramco, as well as facilities for oil products and gas liquids leased by one of its divisions.

In 1993 its wholly-owned unit Aramco Overseas bought a 34.35% stake at the Maatschap crude oil terminal and storage facilities in Rotterdam from Texaco. These can store 17m barrels of crude oil.

In the Mediterranean, Saudi Aramco leases crude oil storage facilities at Sidi Kerir, the terminal of the Sumed pipeline from the Gulf of Suez to the Mediterranean. Saudi Aramco is a major shareholder in Sumed, whose pipeline capacity has been expanded to 2.4m b/d.

Saudi Aramco's facilities in the US are run by Motiva Enterprise, a 50-50 JV between Saudi Aramco and Shell which is one of the biggest downstream entities in North America.

Saudi Aramco has storage facilities in South Korea, where it is a partner of S-Oil Corp. It has a 40% share in Petron, the main refining, distribution and storage company in the Philippines, which it acquired in early 1994.

Similar facilities are to be acquired in China, where Saudi Aramco has operating equity and is to have an integrated refining/petrochemicals venture in partnership with ExxonMobil and Chinese interests. Having acquired equity in Showa Shell in Japan, Saudi Aramco is also moving into the Indian oil market (see Part 4 in OMT 16).

Vela Marine Int'l, Saudi Aramco's shipping arm, carries over 50% of Saudi Arabia's oil exports. Its fleet includes 27 wholly-owned tankers with a capacity of almost seven million dwt, including ships for oil products. Its vessels have high safety standards. It has tankers chartered on demand.

With the last of tanker orders made since 1990 delivered in March 1995, Vela's oil fleet now consists of: four ULCCs, 19 VLCCs and four products carriers. Of these, 18 new VLCCs have a capacity of more than 4.3m dwt, able to carry up to 30m barrels of crude oil.

There will be additional orders for ULCCs and VLCCs, as Vela's goal is to carry 70% of Saudi crude oil exports. Vela has on time charter several LPG tankers used for CIF deliveries of propane and butane.

Vela was set up in 1984 with four tankers acquired from Norbec. It bought four vessels in 1990, giving it four ULCCs and four VLCCs. It began an expansion programme in December 1990, when it started tendering for the construction of 18 VLCCs - nine with the capacity of 300,000 dwt each, and another nine of 280,000 dwt each. Orders for 15 of these were placed from February 1991, with shipyards in Japan, Denmark and South Korea involved (see background in Vol. 57, Gas Market Trends No. 18).

The National Shipping Co. (NSCSA), owned 71% by private shareholders and 29% by the state, is the second biggest shipper of petrochemicals in the world. Its fleet includes 26 chemical tankers and general cargo ships. The chemical tankers have a total capacity of 381,000 dwt. It has five double-hull VLCCs of 300,000 dwt each ordered on Jan. 1, 1994 from MHI of Japan, with each vessel able to carry 2.1m barrels of crude or oil products. They were delivered in 1996-97, and three of them were leased to Vela. It has also ordered two oil products carriers leased to Vela.

In mid-2000 NSCSA ordered four double-hull VLCCs each with a capacity of 2.2m barrels, in a $330m deal with Samsung of South Korea. One was delivered in October 2001. The others were delivered in February, May and October 2002. They brought its oil carrier capacity to more than 19m barrels.

In April 2003 NSCSA and Chevron Transport Corp. (CTC) signed a three-year contract whereby the latter was to load at least 12 full crude oil cargoes per annum from the Saudi Gulf of Ras Tanura to East Africa onto NSCSA's VLCCs. NSCSA was then to take the oil to North America, West Europe, East Asia and Australia.

National Chemical Carriers Co. (NCCC), owned 80% by NSCSA and 20% by SABIC, was set up in May 1990 to transport chemicals produced by SABIC's ventures (mostly JVs with foreign companies - see DT). Its fleet is growing rapidly.

Al Bakry Navigation Co., a private Saudi firm, has a growing fleet as well, including chemical tankers (see background in Vol. 57, Gas Market Trends No. 18)