June 16, 2024

Scarcer and pricier, KEBCO flows fail to make a big splash

In the early days of the Russia-Ukraine war, Kazakh export producers created the KEBCO grade, the last remnant of Urals in Europe. Disassociating Kazakh-origin barrels from Urals was a smart move as differentials of Urals were plummeting back then, regardless of whether the oil was produced in Russia or Kazakhstan. At the same time, KEBCO remains intrinsically linked to Urals, being blended in the Samara hub as the Russian flows are, effectively maintaining the same quality.

For seaborne buyers of Urals that could not or would not purchase any Russian-origin oil, KEBCO seemed to be the ideal way out. However, time and time again, the biggest limit to higher KEBCO flows was supply itself. First, the overwhelming majority of Kazakhstan’s oil production is moved to CPC Blend and the whatever remains organically flows to the domestic refining system. Second, the largest recipient of KEBCO cargoes last year was not an Italian or some other Adriatic refinery, but the 100 kbd Petromidia refinery in Romania, effectively Kazmunaigas’ equity-to-equity flows. Third, Kazakhstan has been consistently overperforming its OPEC+ production target and at some point there needs to be a decision taken regarding the long-term viability of its production cut commitments. Before Tengiz maintenance kicked in May, Kazakhstan’s total production rate stood at 1.857 Mbd, some 50 kbd higher than in March and only marginally lower than the 1.92 Mbd rates seen in January-February. Yet considering Tengiz output was supposed to drop 10% last month from a base rate of 652 kbd seen in Q1 2024, the 60-70 kbd drop is unlikely to have altered the overall fact of compliance (or lack thereof) considering the country still only produces some 80-90 kbd of condensate.

Production outlook for Kazakhstan’s three main producing fields, kbd.


Source: Kpler.

For all the reasons stipulated above, the limitations of KEBCO have barred it from becoming a bigger phenomenon in Europe. The premises are still constructive – to take but one example, KEBCO remains pretty much the only seaborne option for Central European refiners to source Urals-replacements for their refineries – however, unless there is enough supply to boost the medium sour grade’s market penetration, it is going to remain a flow constrained to the Mediterranean. The market presence of KEBCO has declined in recent months as the grade three-month average pace of outflows sunk below the 200 kbd mark, to 170-180 kbd lately. KEBCO exports decreased in volumes despite the 120 kbd Chimkent refinery going for a full shutdown between March 25 and April 28 and most probably will remain subdued when the other major supplier to the domestic market, the 120 kbd Pavlodar refinery, halts refining from mid-June to mid-July. Barring the traditional Petromidia flows to Romania, which have restarted following two-month-long turnarounds at the 105 kbd refinery’s atmospheric distillation unit, KEBCO has managed to keep its second-largest market, Italy. Bulgaria’s Lukoil-operated Burgas refinery is now taking in occasional cargoes following its sourcing shift away from Russian oil, Serbia’s NIS imports a sporadic tanker as well. Add to this three Ust-Luga loaded Aframaxes sold to Rotterdam, and you see the full picture of KEBCO exports in 2024 ytd.

Kazakhstan has also been working to increase the volume of crude transit that Transneft allow through its system all the way to the Schwedt refinery in Germany. Having already established a relatively sustainable pattern of 100kt/month deliveries (equivalent of 23 kbd), Kazmunaigas is now looking to hike it to 120kt/month (29 kbd). A relatively small change in the overall environment of Kazakhstan’s upstream industry, however considering how strained Schwedt generally is for the sourcing of its barrels, there is sizable upside in Kazakh transit flows. The only question is whether a potential deterioration of ownership disputes around the previously Rosneft-operated refinery would not prompt Russia to scrap the transit flows altogether. From a Russian standpoint, the fact that Kazmunaigas provides almost 30 kbd of crude sourced from the Karachaganak field, mostly 42-43° API in density, allows for a lightening of Druzhba-supplied volumes, so there’s a quality-improving aspect to Kazakh transit flows as well.

KEBCO FOB Novorossiysk differential vs Dated, $/bbl.


Source: Argus Media.

Even though Europe’s medium sour differentials have seen an across-the-board upswing recently with Johan Sverdrup rebounding to premiums over Brent, KEBCO’s pricing ascent has been particularly robust. The FOB Novorossiysk quotes of the Kazakh grade now trade between a -$1 to -$2/bbl discount to Dated, up more than $2/bbl in less than two weeks. In terms of CIF Augusta pricing, this would equate to a $2.0-2.5/bbl premium over the same benchmark and even though there has been some softening in the Med freight market out of Novo, we pin most of this pricing upside to limited availability and strong regional demand amidst stagnant (but historically still elevated middle distillate cracks and solid bitumen interest). Perhaps, less KEBCO supply isn’t all that negative for exporters.

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