Analysis: Indonesia aims to cut crude import costs with Azerbaijan term deal
Indonesia’s state-run energy firm Pertamina planned to tie a term supply contract to receive a regular dose of Azerbaijan’s light sweet crude, in a deal that could potentially help the southeast Asian consumer cut procurement costs at a time of rising benchmark Brent crude oil prices.
Pertamina had been regularly buying Azerbaijan’s flagship Azeri Light crude oil in the international spot market through various trading firms, but the state-run Indonesian company was looking for ways to trade directly with the government of Azerbaijan and the country’s state-run oil and gas producer Socar, a senior executive at Pertamina Thursday said.
“We have had no direct cooperation with Socar but we aim to build a close and long-term basis relationship [in order to work out] more efficient and economically viable supply deals,” Pertamina’s director of investment planning and risk management Gigih Prakoso told S&P Global Platts on the sidelines of the IPA conference and exhibition held in Jakarta.
“First, the cooperation will be government to government basis and we expect to follow up with a business to business cooperation with Socar this year,” Prakoso said.
Prakoso also noted that Pertamina had been importing around 400,000 b/d of crude oil over the past few quarters and 30% of the total imports consisted of Azeri Light crude, as the light sweet grade was seen as economical and suitable for the company’s refinery systems.
The sustained strength in benchmark Brent crude oil prices had pushed the Brent/Dubai Exchange of Futures for Swaps to multi-month highs, discouraging many regional refiners to take North Sea, Mediterranean and West African crude oil grades linked to the European benchmark. This provided the impetus for Asian buyers to focus on Middle Eastern sour crude oil supplies, market sources said.
The Brent/Dubai EFS — a key indicator of Brent’s premium over the Middle Eastern benchmark that often serves as a barometer of the strength in the European crude complex — averaged $3.56/b in March, the highest monthly average since June 2014, when it averaged $3.57/b.
However, Indonesian refiners’ inability to process large volumes of heavy density and high sulfur crude oil meant that the southeast Asian importer needed to depend heavily on light sweet crude suppliers from the Mediterranean and West African markets.
Trade sources noted that Pertamina’s plan to procure Azeri Light on a regular term basis did not come as a big surprise as the light sweet grade had been considered one of the most economical options within the Brent-linked Mediterranean and West African crude complex so far this year.
AFFORDABLE AZERI LIGHT
The light sweet Mediterranean crude complex had been facing plenty of downside pressure in recent months due to the pick up in US crude exports to Europe amid widening of the spread between Brent and WTI crude oil benchmarks.
The spot differential for Azeri Light had been trending lower over the past several months. The light sweet grade on FOB Ceyhan basis was assessed at a premium of 70.5 cents/b to forward Dated Brent on Wednesday, the lowest differential since October 30, 2017 when it commanded a premium of 65 cents/b.
“Typically Nigerian and Angolan light sweet grades have been Indonesia’s main refinery feedstock options but the relative weakness in the Azeri price differential this year could have lured Pertamina,” a sweet crude oil trading manager at a European trading company said.
In comparison, price differentials for light sweet West African grades had fared better than their Mediterranean counterparts over the past couple of quarters, with Nigeria’s Forcados crude oil rallying to a multi-year high in late Q1.
Forcados rallied to a premium of $1.55/b to forward Dated Brent on March 5, the highest level since April 16, 2015, when the light sweet crude oil grade was assessed at Dated Brent plus $1.75/b, Platts data showed.
Meanwhile, the spread between Nigeria’s flagship Qua Iboe crude oil and Azeri Light had narrowed sharply in recent weeks, with the West African grade assessed at a discount of 10 cents/b to the Mediterranean grade Thursday, compared with a discount of $1.25/b on April 16.
“It takes longer for West African crude delivery to Asia … stable supply [of the light sweet Mediterranean grade] may prove to be a cost-saving move,” a trader at a southeast Asian refining company said.