Sourcing Crude Oil

Global Supply Chain

Risks and Opportunities

T.Srinivas
CM
KEY ELEMENTS OF THE OIL MARKET
• Global oil trade
– Largest
– Implications around: USD 1970 billion annually (54 mmbpd
@$100/bbl)
– Wealth transfer: $1/bbl change – USD 19.7 billion (Rs.84,710 crores)
phenomenal
• India
– Imports – about 120 million tonnes
– Sensitivity
• 1 $/bbl: USD 885 million
• 5 $/bbl: USD 4425 million

– 2002: low price: $17/bbl high: $28/bbl

– 2003: low price: $22/bbl high: $31/bbl
– 2004: low price: $27/bbl high: $41/bbl
– 2005: low price: $34/bbl high: $59/bbl Dubai prices
– 2006: low price : $54/bbl high : $72/bbl
– 2007: low price : $49/bbl high : $89/bbl
– Cash flows go haywire
 Sourcing Crude – Issues
Hmmm… nearby Heck… Oil prices
crude oil may be the fluctuate so often –
best option – lower How can I decide on
freight! sourcing?

Hmmm…Should
Hey… quality of technical or
crudes is different economic criteria
– How do I value take precedence?
different grades?

Make products or
Buy crude oil?

Keep it simple.. just

buy one crude –
Refinery operations
will be stable
Presentation covers….
• Refresher on oil supply and demand
– Demand centres, Supply sources, Reserves
• Market evolution
• Major crude oil markets
– Opportunities & Risks
• Crude oil pricing
• Importance of Freight costs
• Valuation of crude oil
• Approach to crude oil sourcing
 World Primary Energy Consumption
1997 : 8907 MTOE
2007 : 11099 MTOE % Share
Energy World India
source 1997 2007 1997 2007
Oil 38.5 35.6 33.2 31.8
Gas 22.7 23.8 7.7 8.9
Coal 26.0 28.6 52.1 51.4
Hydel 6.6 6.4 6.1 6.8
Nuclear 6.1 5.6 0.9 1.0
Primary Energy CAGR: 2.2%
Oil has shown a fall in share
MTOE : Million tonnes of oil equivalent Source : BP
 WORLD OIL CONSUMPTION
Regionwise share out 1997 vs 2007
India’s share(%) 2.5 3.3

World CAGR:1.5%, A-Pac:2.6%

*Consumption includes
(MMBPD) 73.6* 85.2* ethanol, bio-fuels, etc

3433 3953 Source : BP

WORLD OIL CONSUMPTION - FUTURE
2010-2030

CAGR:
World:1.3%
APac:1.8%

MMBPD 90.7 97.4 103.6 110.2 117.6

Source :EIA
WORLD OIL SUPPLY - THE PAST
%age share out

1997 : 72.2 MMBPD 2007 : 81.5 MMBPD

Source : BP
 WORLD OIL SUPPLY:FUTURE
2010-2030

OPEC (% share) 42 43 45 46 48

OPEC share rising from 42% currently to 48% Source :EIA

 REFINERY CAPACITIES
(%REGION-WISE SHARE)

1997 : 78.8 MMBPD 2007 : 87.9 MMBPD

GLOBAL CAPACITY INCREASED BY ABOUT 9 MMBPD.

INCREASE IN ASIA PACIFIC REGION IS ABOUT 5 MMBPD

Source : BP
 GLOBAL OIL RESERVES
(AS OF END 2007)

Reserves : 1238 billion Barrels

Reserves : 168 billion Tonnes

INDIA’S RESERVES: 5.5 billion BBLS (0.4% OF WORLD

RESERVES)
0.8 billion TONNES
Source:BP
GLOBAL OIL RESERVES
As of end 2007
• EXPECTED TO LAST FOR 41.6 YEARS
• HUGE RESERVES IN THE MIDDLE EAST
RESULTING IN RISING SHARE OF
OPEC SUPPLIES
• FUTURE CRUDE SLATE EXPECTED TO
BE DOMINATED BY HEAVY SOUR
GRADES
• LARGE GLOBAL DEPENDENCE ON
MIDDLE EAST FORESEEN
RESERVES TO PRODUCTION RATIO
( as of end 2007)
Years

INDIA’S R/P RATIO: 19 YRS

 OPEC
• What is OPEC?
– The Organisation of Petroleum Exporting Countries
(OPEC) is a voluntary Organisation with objective to
• Co-ordinate and unify petroleum policies among
Member Countries, in order to secure fair & stable
prices for producers
• regular supply of petroleum to consuming nations;
• fair return on capital to those investing in the industry.
• Why was it formed?
– Cheap oil flowing from Russia.
– Western companies having oil fields in Middle East, etc.
cut oil prices affecting revenues of those countries.
– Prompted the formation of OPEC.
• When was it formed?
– Sep’1960 at Baghdad Summit
 Algeria 1.36 Ecuador 0.52 OPEC
MEMBERS AND
Indonesia 0.87 PRODUCTION
Iran 3.82 QUOTA (MMBPD)
Kuwait 2.53
Founder members
Libya 1.71
Nigeria 2.16
Qatar 0.83 1 Saudi Arabia
Saudi Arabia 2. Iran
8.94
3. Iraq
UAE 2.57
4. Kuwait
Venezuela 2.47
Iraq 5. Venezuela
Source : IEA
Angola 1.90
 World Oil Supply and Demand
Figs in million bpd Source: IEA
2007 Q108 Q208 Q308 Q408 2008 2009

DEMAND (A) 86.1 86.9 85.7 85.9 87.6 86.5 87.2

SUPPLY CALL on OPEC
Non OPEC supplies 49.6 49.8 49.7 49.0 50.5 49.8 50.4
OPEC crude* 31.1 32.4 32.2 32.5 31.7 31.6 30.9

OPEC NGLs 4.8 4.9 4.9 5.1 5.4 5.1 5.9

TOTAL SUPPLY(B) 85.6 87.1 86.8 86.7 87.6 86.5 87.2

Global Stock(B-A) -0.6 +0.2 +1.1 +0.7 -- -- --

• OECD demand is2.2% below the last year’s level on economic slow down.
• IEA has forecasted an oil demand growth of 0.7 mbpd in 2009 but call
on OPEC is likely to come down as Non OPEC producers like FSU and
Latin America are likely to increase production..
*OPEC production figures includes Angolan and Ecuador production
 Price Trends : Marker Crude Oils
(Annual Average Prices)
Demand surge,
limited spare
ng introduction of price band production cut by OPEC capacity with OPEC,
Geopolitical tension,
increasing activities
of speculators pulled
up prices
(Figs in $/bbl)

Prices fell
following South
East Asian
financial crisis

Prices remained
strong on
speculative inflow

2008: Average till 13th Oct 08

 Price Trends : Petroleum Products
(Annual Average Prices)
(Figs in $/bbl)

2008: Average till 13th Oct 08

 Price Trends : Petroleum Products
(Annual Average Prices)
(Figs in $/bbl)

2008: Average till 13th Oct 08

 INTERNATIONAL OIL PRICES
• Prices are market determined – the prices are
transparently decided in the market.
• INFLUENCING FACTORS…..
– Supply and demand fundamentals
– OPEC policies
– Political/economic developments in the
exporting / consuming countries
– Weather conditions
– Alternative fuels (natural gas)
– Freight markets (environmental
considerations - double hull)
– Large financial funds/ institutions
 Recent developments in
international market
• Geopolitical Factors
– Iran’s tussle with western West over its nuclear projects
– Threat of attack on US embassies in Gulf countries
– Civil unrest in Nigeria causing production stoppage.
– Unrest in Iraq
• Spectacular demand growth
– Oil demand growth rate peaked at 3.7% in 2004 and grew
further 1.4 % in 2005 and 1.0% in 2006. (CAGR 1.5% in last
20 years)
– Strong demand from US, China, India and other Asian
countries
 Recent developments in
international market
• Tight refinery capacity
– Globally refineries struggling to cope with rising
product demand
– No new refinery in US after 70s
• Other factors
– Increased activities of speculators at NYMEX
and IPE
– No production growth in Non OPEC oil
producing countries.
Open positions of Non-commercials on NYMEX
 Oil Trading - Evolution
Pre OPEC
•Not much trading
•Domination by seven sisters Formation of
•Integration across supply Chain OPEC
•Stable oil prices

Large imbalances between Post OPEC

consuming and producing
regions - huge trading
potential
•Split in control of producing
assets
•Split in refining & marketing
assets
•Trading evolved in big way
•Volatility in oil market
 Classification of Oil Trade
EXCHAN
GES

PAPER OTC

OIL TRADE

PHYSICAL
S

Both physicals and paper market trades important in price discovery

Oil Trading – Market Structure
 Global Crude Oil Markets
SOUTH FAR
AMERIC EAST CIS
A

MIDDL W
E CRUDE OIL AFRIC
EAST MARKETS A

NORTH CENTRAL
US
SEA AMERICA
MARKE
T
 Oil Supply Sources - Middle East
Production Consumption Surplus/Deficit
1202 294 (+)908

Qty. in mmtpa

Source: BP
 Oil Supply Sources – Asia Pacific
Production Consumption Surplus/Deficit
379 1185 (-)806

Qty. in mmtpa

Source: BP
 Oil Supply Sources – Africa
Production Consumption Surplus/Deficit
488 138 (+)350

Qty. in mmtpa

Source: BP, EIA

Oil Supply Sources – S & C America
Production Consumption Surplus/Deficit
333 252 (+)81

Qty. in mmtpa

Source: BP
Oil Supply Sources – North America
Production Consumption Surplus/Deficit
643 1135 (-)492

Qty. in mmtpa

Source: BP
Oil Supply Sources – Europe and Eurasia
Production Consumption Surplus/Deficit
861 950 (-)89

Qty. in mmtpa

Source: BP
 Oil Exports – Market Structure
Implications for trading
• Middle east:
– Dominated by National Oil Companies viz.
Saudi Aramco, ADNOC, NIOC, KPC, SOMO,
etc.
– Crude oil usually sold on term contracts only.
• Europe
– UK/Norway large exporters - Statoil, NOC of
Norway, a key player. UK producers are
private companies
 Oil Exports – Market Structure
Implications for trading
• West Africa:
– Usually a 50/50 JV between National Oil
Companies & MNCs
– Crude oil finds its way into spot market
• South & Central America:
– Venezuela & Mexico major exporters - NOCs of
respective country play a major role in exports
– Sold on term as well as spot basis.
• North America:
– US and Canada has no NOCs
Risk Profile – Major Oil Exporters
High Indon Ango
Iraq esia
Yem Vietn Rus laNigeri
en am sia a
Alger
Medium Iran ia Venez
High Libya uela
Malay
S.Ara
Medium bia
sia Egyp Colum
Kuwa t bia
it
Om
Medium an UAE Mexi
Qat co
Low ar
Low Norw
Can
UK ay
ada

Distance from India

POLITICAL RISKS - SUPPLY SOURCES

Major Oil Exporters:

Global exports

– High Risk (%) 33

– Medium/High Risk(%) 20
– Medium Risk (%) 28
– Medium/Low Risk (%) 10
– Low Risk (%) 9

Source: BP/EIA
 Risks
• Exportable production in politically sensitive
areas
• Fluctuation in prices of different crude oil
• Fluctuation in prices between crude oil and
products
• Regional dislocation has repercussions for
global supply chain
• Influence of OPEC – A seller dominated
market
• Dependence upon marker crude oil
 Oil Markets - Opportunities
• Oil Trading is global in nature and typically oil
moves across borders – with minimal
restrictions.
• Based on refinery configuration, one is free to
look at various types/sources
• Well developed shipping market helps in crude
oil transport across regions.
• Considerable transparency in trading/pricing
Oil Pricing – Mechanism
 PRICING

• In the oil market, trades are usually done on

a variable market related pricing basis
• The price of the product being imported is
not known at the time of purchase but is
based on the price prevailing at the time of
loading.
 Oil Pricing
• Three dimensions
– Physical spot market activity
– Forward market activity with physical deliveries
– Exchange/Swap markets
• Impact of variable market related pricing The
entire sale of physical oil in the international oil
market is priced based on the last barrel of oil
traded in the market.
Eg: If the last cargo of a grade of crude oil is traded at a
premium or discount, the same gets reflected in the
sale/purchase price of the entire volume of crude oil.
Term or spot purchases are same from the ‘price
perspective’
 Oil Pricing
• Price discovery mechanism is the key
• In the market today, Platts is the dominant and
influential price publishing agency.
• In Asia Pacific market, Platts arrives at pricing of
crude oil and petroleum products using:
– Market On Close method viz. trades at market close are
reckoned for assessing the price.
– Trades done in their Trading Window are only
considered
• Other agencies like Petroleum Argus, etc. publish
their price assessments based on ‘full day’ trades.
However, these are not widely used in pricing of
physical crude oil and products, particularly in Asia
Pacific.
 CRUDE OIL TRADE - PRICING BASIS

• PRICING BASIS FOR THE CRUDE OIL

CONTAINS THE FOLLOWING ELEMENTS:
– LINKAGE TO A MARKER CRUDE OIL VIZ WTI,
BRENT, DUBAI/OMAN, TAPIS, ETC
– PRICE OUT PERIOD VIZ. NO. OF QUOTES TO BE
TAKEN AROUND/AFTER BILL OF LADING
– PUBLICATIONS TO BE CONSIDERED FOR THE
PRICING BASIS.
– PREMIUM/DISCOUNT TO REFLECT QUALITY,
LOCATION, ETC.
Irrespective of term or spot imports, the prices are finalised
on variable market related viz. price prevailing around time
of loading will apply.
 Oil Pricing- Spot market
• Platts methodology(Singapore)
– Trading Window open from 4.00pm to 4.30
pm Singapore time.
– Trading lot is kept small (25000 barrels) –
called partials
– Markers like Dubai and Oman are traded.
Minas & Tapis have been started recently
– Platts only considers deals finalised or firm
bid/ask prices on offer during this window.
Deals outside this window are not considered
in the price assessment.
 Crude Oil Pricing - Challenges
Grades Marker
similar
but not
GPW identical
Hundreds
of grades

Little use
directly

Needs Few
Refining grades
traded
actively
 Characteristics of a Marker
Significant Diversity of
Production volumes ownership

Versatile, good
MARKER Export in shippable
quality & desired by CRUDE cargo lots
Refineries OIL

Actively Traded in Free of destination

the Paper Market restrictions
 Marker crude oils
North/South American
Region WTI

North Sea, Nigerian,

Angolan, Libyan Grades etc
BRENT

Middle East countries like

DUBAI
Saudi Arabia, Kuwait, Iraq
/OMAN
Malaysian, Indonesian,
Australian Grades TAPIS
 VALUATION OF CRUDE OIL
• Crude oils may be similar but
no two crude oils are identical
in all their physical and
chemical characteristics

• How are crude oils valued?

 Crude oil classification
• API Gravity – Measure of the gravity of oil
– API gravity = 141.5/(SG at 60 deg F) -131.5
– Based on API gravity a crude oil is called light,
medium or heavy
• Sulphur content
– Low Sulphur (referred to as sweet in trade
circles)
– High Sulphur (referred to as sour in trade
circles)
 QUALITY DIFFERENTIAL
BRENT (Low Sulphur) VS DUBAI (High Sulphur)
(LAST 5 YRS)

No discernable trend witnessed in quality differential between high

sulphur and low sulphur. Factors like regional supply/demand,
tightness in HS crude availability etc have resulted in fluctuating
differentials.
 CRUDE PURCHASE - ILLUSTRATION
Item African Far East

Crude price 85.0 83.0

Freight 2.5 2.3

Refining Costs 0.5 0.4

Total costs 88.0 85.7

 VALUATION OF CRUDE OIL
• REFINING MARGIN
GROSS PRODUCT WORTH(GPW)
MINUS
CRUDE OIL LANDED COST AT REFINERY
MINUS
VARIABLE OPERATING COSTS OF REFINERY
=
REFINING MARGIN.
 GPW - AN ILLUSTRATION
African crude Yield(%wt) Product price (Landed) VALUE
($/MT) ($)
LPG 3.5 730 3.5 x 730 2555.0
NAPH/MS 20.0 800 20 x 800 16000.0
SKO 10.0 820 10 x 820 8200.0
HSD 51.0 810 51 x 810 41310.0
LSHS 10.0 500 10 x 500 5000.0
F& L 5.5 - - -
TOTAL 100.0 73065.0

GPW OF CRUDE = 73065.0 /100 = 730.65 $/MT

GPW ($/bbl) = 730.65 /7.38 = 99.00 $/BBL
 CRUDE PURCHASE - ILLUSTRATION
• AFRICAN AND FAR EAST CRUDE OILS ARE
AVAILABLE FOR IMPORT
• YIELD AFRICAN FAR EAST Landed cost
of products
• LPG 3.5 3.7 730
• SRN/MS 20.0 15.0 800
• KERO 10.0 10.0 820
• HSD 51.0 49.0 810
• LSHS 10.0 17.0 500
• F&L 5.5 5.3 -
• TOTAL 100.0 100.0
• GPW($/bbl) 99.00 96.33
 CRUDE PURCHASE - ILLUSTRATION
Item African Far East
Crude price 85.0 83.0

Freight 2.5 2.3

Refining Costs 0.5 0.4
Total costs (A) 88.0 85.7
GPW (B) 99.0 96.3

Ref Margin (B-A) 11.0 10.6

CRUDE OIL TRADING
MECHANISM
 CRUDE OIL TRADE

OIL TRADE

TERM TENDERS/SPO
CONTRACTS T
MARKET

TERM MONTHLY
 CONTRACT - SALIENT
FEATURES
• BUYER • PAYMENT TERMS
• SELLER • PUBLICATION
• QUALITY/GRADE • MODE OF DELIVERY
• QUANTITY - FOB/C&F, ETC
• LOADING MONTH/ • GOVERNING LAW
PERIOD • VALIDITY
• PRICE LINKAGE • GENERAL TERMS
• PRICE OUT PERIOD AND CONDITIONS
 GENERAL TERMS AND
CONDITIONS (GTCs)
• QUALITY/QUANTITY • FORCE MAJEURE
MEASUREMENT • LIABLITY
• INSPECTION
• LIQUIDATION
• NOMINATION OF TANK
SHIPS AND • ASSIGNMENT
SUBSTITUTION • NOTICES
• LAYDAYS/LAYCAN • ARBITRATION
• ARRIVAL OF
TANKSHIP/DISCHARGE
• DESTINATION
• LAYTIME/DEMURRAGE
 Contractual terms – Key concerns

Fly by night Inc (Parent) Fly by night Ltd (Subsidiary)

• Trade: IOC Buys • Trade: IOC Sells
• Cargo volume: 500 kb • Cargo volume: 500 kb
• Loading date: 10th Sep’08 • Loading date: 20th Sep’08
• Grade: Dubai • Grade: Oman
• Payment term: 30 days • Payment term: 30 days
• GTC: As per Shell • GTC : As per NNPC
• Delivery: FOB • Delivery : C&F
 Contractual terms – Key concerns
Fly by night Inc (Parent) Fly by night Ltd (Subsidiary)
• Trade: IOC Buys • Trade: IOC Sells
• Cargo volume: 500 kb • Cargo volume: 500 kb
• Loading date: 10th Sep’08 • Loading date: 20th Sep’08
• Grade: Dubai • Grade: Jet Kero
• Quality: NEQ • Quality: As per specs
• Payment term: 30 days • Payment term: 30 days
• GTC: As per Shell • GTC : As per NNPC
• Risk & Title • Risk & Title
 Indian Crude Oil Basket
• Comprises three marker crude oil grades:
– Dubai (Sour grade)
– Oman(Sour grade)
– Brent Dated (Sweet grade)

Indian Basket

Dubai & Oman Brent (dated)

Average 62.3% 37.7%
FREIGHT MARKET
 OIL TANKERS - CLASSIFICATION
All fig in DWT
ULCC
3,20,000 & above

VLCC
160,000-319,999

LR II
80000-159999

LR1
45000-79999
VLCC= Very Large Crude Carrier MR
ULCC= Ultra Large Crude Carrier 25000-
 CHARTER PARTY
• Time Charter
Charterer pays loading, unloading, bunkers,
port charges, agency and becomes
disponent owner

• Voyage Charter
Owner pays loading, unloading, bunkers,
port charges, agency
 Freight market – World Scale
• Every year, World Scale Association (WS) publishes freight
rates for voyages between various ports in the world.

• Freight rate basis:

• Vessel size: 75000 tons

• Fixed hire: USD 12000/day

• Bunker price: USD 328.75/mt (Oct’06-Sep07)

• Bunker fuel (steaming:@55mt/day; Others:100 T/Voyage; 5 tons/each
port involved)

• Freight rate is for one round voyage

• Standard cost ($/MT) of particular journey is given in world

scale which is equivalent to WS 100.
FREIGHT RATES(AFRA)
FREIGHT COSTS - ILLUSTRATION
Based on Ws 2008 rates
• VOYAGE: RAS TANURA TO VADINAR
• WORLD SCALE FRT RATE = $ 4.94/MT
• AFRA(Aug’08)
– VLCC = 134.4
– S.MAX = 175.2
• FREIGHT RATES:
– VLCC = 4.94 x 134.4/100 = $6.64/MT
– S.MAX = 4.94 x 175.2/100 = $8.65MT
– Difference = $2.02/MT

On 10 million tons import through VLCC, freight savings are

about $20.15 million or Rs. 87 Crores.
FREIGHT COSTS - ILLUSTRATION
(BASED ON WORLD SCALE 2008 RATES)

• VOYAGE: AG TO HALDIA
• WORLD SCALE FRT RATE = $9.91/MT
• AFRA FOR Aug’08
– VLCC = 134.4
– LR-II = 175.2
• FREIGHT RATES:
– VLCC = 9.91x 134.4/100 = $13.32/MT
– LR-II = 9.91 x 175.2/100 = $17.368/MT
– Difference = $ 5.95/MT
• On 10 million tonnes import, freight savings are
about $59 million. (Rs. 255 crore)
 OIL IMPORTS

TERM
CONTRACTS TENDERS

TERM MONTHLY
 Diversification of supply sources
(2006-07)

Source:PPAC