China, Japan and South Korea are mounting a new combined challenge to the “Asian premium”, long a scourge of regional oil-importing economies.
The term refers to the US$1-US$2 (HK$7.80-HK$15.60) per barrel premium Middle Eastern oil producers, particularly Saudi Arabia, automatically levy on sales to Asian customers.
The issue’s urgency is growing for China, which imports two million barrels of crude per day – about 70 per cent from the Middle East. Bejing will have to increase that intake in order to sustain its rapid economic growth.
The surcharge of as much as US$2 per barrel could be adding as much as US$1 billion to China’s annual energy bill. And with imports expected to grow by another 400,000 barrels per day next year, there is no end in sight.
Analysts say the Asian premium mainly reflects the fact that Asia is more dependent than Europe and North America on Middle Eastern oil.
But now China, Japan and Korea are together searching for ways to eliminate the premium through an ad hoc body known as the Committee on Northeast Asian Co-operative Initiative.
“The heavy amount we import is another leverage we can use to persuade the Middle East to see things our way,” chairman Moon Chung In was quoted as saying in the Korea Herald this week.
The three countries may work out a deal to make joint purchases of crude oil, said Moon, although officials of Korea National Oil Corp, the country’s state oil firm, said many details remained unresolved.
Though China has already overtaken Japan as the world’s second largest oil consumer, China’s position is somewhat more advantageous.
That is because it has been less conservative than Japan in purchasing crude and has made more headway in diversifying its import sources.
To be sure, Middle Eastern countries such as Saudi Arabia, Oman and Iran still provide the bulk of its imports, but China is also buying more crude from Africa and Russia.
Imports from Russia rose by 73 per cent to 5.25 million tonnes (105,000 barrels per day) last year and may reach six million tonnes this year.
However, China’s soaring oil demand means its dependency on the Middle East will not end anytime soon. Even if China, Japan and Korea were to form an oil-purchasing consortium, the Saudis would still call the shots because Asia does not have that many alternative sources, said a crude oil trader at state-controlled Sinopec.
Unless market dynamics change and substantial amounts of Russian crude head its way, China will continue to depend on Saudi Arabia for most of its crude imports, the trader said.
Saudi Arabia is counting on boosting crude exports to China next year through a US$3.5 billion joint venture refinery and petrochemicals project with Sinopec and Exxon Mobil in Fujian. Analysts say without more supply from other sources, particularly Russia, the Asian premium will be hard to get rid of. In addition, they say China needs to start satisfying more of its energy needs with natural gas.
Japan and Korea already have mature gas markets but China’s is still in its infancy.
China National Offshore Oil Corp has plans to build eight to 10 liquefied natural gas terminals in the industrialised eastern coastal provinces but, because of uncertain market demand, analysts do not expect all of them to materialise. There are also suggestions that China, seen as the main culprit in the recent price spike, will have no other choice eventually than to curb its demand.
Even under the best case scenario, with a lot of new oil hitting the market, Asian countries will have to trim their demand by as much as one million barrels per day to eliminate dependence on Saudi Arabia, a report by the James A Baker III Institute for Public Policy said.
Other efforts to eliminate the Asian premium may include making better use of arbitrage opportunities, which are essentially supply-related fluctuations in the price of oil in different places at different times.
However, these are limited by the destination restrictions imposed by some Middle East oil exporters on term cargoes or long-term supply.
Asian importing countries and leading Middle East producers will debate the Asian premium issue at a conference in New Delhi on January 6.