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Trade Deal Spurs Record Flow of North Sea Oil to South Korea

Trade Deal Spurs Flow of Arbitrage North Sea Oil to South Korea
South Korean refineries have been exempt from a 3 percent import tax on crude imports from EU as of July 1, 2011. Photographer: SeongJoon Cho/Bloomberg

An unprecedented 24 million barrels of North Sea crude were exported to South Korea since December after a free trade agreement with the European Union opened the 16,500-mile (26,500-kilometer) arbitrage trade.

Twelve very large crude carriers have been booked to transport the oil to South Korea since mid-December, the most on record over a five-month period, according to tanker reports and ship-tracking data from IHS Inc. The FTA, which started in July 2011, gives refiners in the Asian nation about a $3 a barrel discount compared with supplies from other countries.

“There has been a significant increase in volumes of North Sea crude shipped to Asia since December,” Bob Knight, managing director of tankers at London-based Clarkson Plc, the world’s biggest shipbroker, said by phone yesterday. “The FTA agreement has been one of the contributing factors in this increase.”

The agreement, the world’s second-largest after the U.S., Canada and Mexico pact in 1994, was signed in October 2010 and approved by the EU and South Korean lawmakers in February and May last year, respectively. The accord expands their 70 billion-euro ($88 billion) trade relationship by scrapping import duties and other barriers, making 99 percent of commerce duty-free within five years.

South Korean refineries have been exempt from a 3 percent import tax on crude imports from EU as of July 1, 2011, according to the FTA agreement.

Defend the Arbitrage

One VLCC typically holds 2 million barrels of crude. Based on current prices, the 3 percent tax benefit would save buyers at least $6 million, enough to pay for a supertanker to transport the oil from Europe to South Korea.

“This is how you can defend the arbitrage down to South Korea,” Torbjoern Kjus, senior oil market analyst at DNB ASA in Oslo, said by phone yesterday. “Had that FTA not been in place, you probably would not see so many cargoes leaving for that particular country.”

Most North Sea oil fields are located offshore of the U.K. and Norway. While Norway is not a member of EU, it has a free trade agreement with South Korea through the EFTA, or European Free Trade Agreement, which comprises Norway, Switzerland, Lichtenstein and Iceland, Svein Michelsen, a communication adviser at Norway’s Foreign Ministry, said by e-mail on May 21, adding that the accord with South Korea includes oil and gas.

About 15 million barrels, or 60 percent of North Sea crude shipped to South Korea from December to May is Forties blend, used to set Dated Brent, the benchmark for more than half of global oil. This is equivalent to 19 percent of Forties shipments during that period.

South Korean Island

“Brent has become a South Korean island and is therefore for now still disconnected to the realities of the Atlantic Basin crude oil dynamics,” Olivier Jakob, managing director of Zug, Switzerland-based research group Petromatrix GmbH, said in an e-mailed report today.

South Korea bought record of 4.11 million barrels of crude from the U.K. in February, according to data from Korea National Oil Corp. This is equal to 5 percent of the nation’s imports in that month.

Refiners in Asia can buy Middle East crude or grades from the Atlantic Basin and their choice normally depend on the value of the lighter, low-sulfur, blends from Europe or Africa versus the heavier, high-sulfur, grades from the Gulf. Lighter blends yield more lucrative products such as diesel and gasoline.

The Brent-Dubai exchange for swaps, which measures the European oil benchmark against the Persian Gulf grade, averaged $3.51 a barrel in the first four months, compared with $5.29 for all of last year, according to data from PVM Oil Associates Ltd. The spread closed on Jan. 16 at $2.32, the narrowest level in 14 months. Traders make more profit from shipping North Sea crude to Asia when the gap between the contracts shrinks.

Details of VLCC fixtures from the North Sea to Asia since December are as follows. The freight is in millions of dollars. Hound Point, Scotland is the loading terminal of Forties, while Mongstad is for Norwegian Troll and Heidrun grades.

Ship         Charterer    Date      Port    Destination  Freight

 the Great       BP       Dec. 12   H. Point  Ulsan           $4
Eliza            N.A.     Dec. 21   H. Point  Yeosu         N.A.
Oliva            N.A.     Jan.  9   H. Point/
                          Jan. 12   Mongstad  Yeosu         N.A.
Great Lady       Vitol    Jan. 15   H. Point  Kawasaki/Yeosu  $7
Front Champion   Statoil  Jan. 21   Mongstad  Ulsan         $6.1
DHT Eagle        Statoil  Feb.  16  Mongstad  Ulsan         N.A.
Ioanna           Shell    March 19  H. Point  Yeosu        $5.95
British Purpose  N.A.     March 29  H. Point  Ulsan         N.A.
Mesdar           Chevron  April 28  H. Point  Yeosu         $7.3
Atlantas         Occidental May 15  H. Point  Yeosu         $6.9
Maersk Hirado*   Statoil  May 20    Mongstad  S.Korea      $6.75
Front Tina       Statoil  May 20    H.Point/
                                    Mongstad  Ulsan         $6.3

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