Saudi Aramco's Marketing - 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 the governments tax away any major fall in oil prices, be that for revenue or for environmental reasons.

However, 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:

- The pricing of LPG under the CP formula, based on what it calls "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. The use of LPG by Japan's power plants has fallen. Naphtha is still competing strongly with LPG.

On the other hand, the availability of Saudi LPG for export in the com-ing years will decline considerably. This is due mainly to a big rise in local demand for LPG by new petrochemical ventures and other industries (see Downstream Trends of this week).

- 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 fallen. The fall in premia has resulted from a rise in the production of sweet grades from the North Sea, now the Caspian region and other areas, as well as the whitening of Saudi Aramco's mix of crude exports (see profiles of the Saudi fields in Part 2).

Saudi Aramco's clients now are short of sour grades. But while price differentials between sweet and sour crudes have narrowed, Saudi Aramco has been earning more from crudes sold in east of Suez markets than from western sales.

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 east of Suez is expected to rise considerably from 2004, when Asia's economies would be growing rapidly once again. Asia would become by far the biggest oil market in the world during this decade. A deep recession in Asia 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 crude to trade on grounds that they need to control its destination.

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 all sanctions against Baghdad have been lifted and Iraq's oil production capacity has been doubled to about 6m b/d.

                   MAJOR GULF SOUR CRUDES, DISTILLATION DATA*

             Crude Oil      Gas     Lt. Dist.      M.D.          3000"
Crude Oil   SG 60 deg. F   C1-C4    C5-185 deg.C   185 deg.+   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 deg. C to 3000" fuel oil. Fuel oils' sulphur contents are: 3.2% in the yield of Arabian Light, 2.4% in Iranian Light's, 4% in Kuwait's, 3.9% in Arabian Heavy's and 2.5% in Iranian Heavy's. (North Sea Forties sweet crude has these distillation data: 0.842% SG 60 deg. 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 deg. API with 0.06% sulphur.

Saudi Aramco moves quantities ASL to 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. Bigger quantities of ASL are being sold in Europe.