Abstract
KAPSARC: The purpose of this paper is to assess Middle East crude oil exporter strategies to maintain or expand market share in Asian oil demand. It also analyses the impact of changing global crude oil flows on key oil exporters’ revenues and on inter-regional price differentials by utilizing the KAPSARC Global Oil Trade Model (GOTM). Oil trade between the Gulf Cooperation Council (GCC) and Northeast Asia (NEA) will be subject to new pressures as major crude oil producers from outside the region compete to place their barrels in Asia. African, Latin American, and Russian flows of crude are increasingly redirected towards Asia, challenging the traditional large exporters in the Middle East. GCC oil producers are engaged in a number of initiatives to protect market shares in Asia.
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Notes
- 1.
It should be noted that crude oil sales to joint venture refineries by GCC NOCs would be priced at arm’s length prices as any other crude oil sales contracts to other refiners. Any implicit discount on crude oil sales would only serve to transfer rents from the NOC to its joint venture affiliate.
- 2.
Data constraints preclude taking into account the sulfur content of crude oil (see Appendix on data sources and notes). We plan to include sulfur content in future versions of this model. While sulfur is an important consideration in crude oil quality (since it imposes the need to invest in expensive desulfurization capacity in order to meet environmental standards), API gravity is the single most important quality characteristic of most crude oils. In general, a crude’s API gravity is an indicator of the proportions of light and middle distillates and residual fuel it yields from a given set of refining processes.
- 3.
The model imposes an arbitrary penalty cost on refiners that diverge from their assumed ideal weighted average API gravity, set as the weighted average API gravity of their actual crude slate in the benchmark year 2012.
- 4.
The massive investments required to set up the ESPO crude export infrastructure to deliver East Siberian crude oil into the Pacific Ocean port of Kozmino are considered sunk costs in any assessment of locational rents, and hence do not reflect ‘full cycle’ economics.
- 5.
This difference in locational rents is based on transport cost differentials; the heterogeneity of crude oil quality is not taken into account, as relative price differentials differ across different crude types in the full model runs.
- 6.
The model results show that revenues do not decrease monotonically as exports are reduced from Novorossiysk since initial reductions lead to a slight increase in revenues as the market tightens with the reduction in exports.
- 7.
The model does not take infrastructural constraints and the costs of building new infrastructure into account in explaining revenue shifts with changes in the regional export allocations of crude oil.
- 8.
Saudi Arabia, Kuwait, Iran, Qatar, and Abu Dhabi are among the large oil producers using some form of formula prices for long-term contracts. Oman and Dubai crudes are among the few Middle East Gulf crudes sold on the ‘spot’ market (i.e., not based on term contracts with end-user and re-sale restrictions). See Mabro, R. (2005). More recently, larger volumes of Abu Dhabi’s Upper Zakum crude oil have been offered as spot cargoes without end-user restrictions. See, for instance, McAuley (2014).
- 9.
OPEC-administered pricing itself was inherited from the dominant cartel of international oil companies (the ‘Seven Sisters’) which established a pricing regime by fiat. Prior to 1974, the Seven Sisters fixed a ‘posted price’ used to compute royalties and the income tax paid to producing countries. When OPEC countries nationalized their upstream hydrocarbon assets, the administered price was effectively the price at which oil was sold and bought in arms-length transactions, usually under term contracts with the respective national oil companies of the exporting countries. See Sampson (1975).
- 10.
For instance, it has been reported that Iraq’s SOMO has been pricing its crude below that of Saudi Aramco in order to attract and retain customers, announcing its monthly OSPs shortly after the Saudi oil company announces its own OSPs. See for instance Sheppard (2014).
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Al-Arenan, S. et al. (2016). GCC-NEA Oil Trade: Competition in Asian Oil Markets and the Russian ‘Pivot’ East. In: Lester, L. (eds) Energy Relations and Policy Making in Asia. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-10-1094-1_4
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