The popularity of light sweet crude oil among refiners is growing at a solid clip. The ongoing push to combat climate change and ever stricter regulations over fuel emissions is forcing refiners to significantly reduce the sulfur content of gasoline and other fuels. High levels of airborne sulfur oxide, which is primarily emitted by the burning of fossil fuels, can adversely affect the human respiratory system, defoliate plants, and cause acid rain. Airborne sulfur particles also contribute to global warming and visible air pollution. Western Europe, the U.S., and Canada have long placed significant limits on the sulfur content of gasoline. By 2018 fuels in those regions were only allowed sulfur content of fewer than 10 parts per million. There are moves to further reduce that content because of the significant environmental risks posed by sulfur emissions. The ongoing global push to substantially reduce sulfur emissions through low sulfur content fuel continues to gain momentum. The Paris-based International Energy Agency claimed in late 2019 that demand for high sulfur content fuels would fall sharply during 2020. A key reason was the introduction of IMO 2020 on 1 January 2020 by the International Maritime Organization. This regulation aims to significantly reduce the sulfur content of maritime fuels to less than 0.05% mass for mass, leading to lower sulfur emissions and improved global air quality. That is a particularly important development because maritime bunker fuel has traditionally been a heavy type of fuel high in sulfur that was a residue from crude oil distillation.
IMO2020 sparked a significant increase in demand for light sweet crude oil from Asian refiners during 2019. Asian refiners since the start of 2020 have been stocking up on light sweet crude because of ever-stricter pollution regulations aimed at cutting sulfur dioxide emissions as part of the fight against global warming. Low sulfur content sweet light crude oils are cheaper and easier to process into low sulfur content high-quality gasoline, diesel, and other fuels, explaining their growing attractiveness for Asian refiners. Many of those businesses also believed that the fallout from the COVID-19 pandemic will not be as severe as anticipated, meaning that demand for high-quality low sulfur content fuels will bounce back earlier and stronger. The return of COVID-19 lockdowns in Western Europe points to that view being premature, but the demand for high-quality low sulfur content fuels will rise significantly once the worst of the pandemic is over. By buying at a time when the international benchmark Brent is below or around $40 a barrel to boost inventories, Asian refiners will maximize margins when oil prices eventually rebound.
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The ongoing global trend will act as a powerful tailwind for sweet South American crude oils and be a powerful driver of the oil booms in Guyana and Brazil. ExxonMobil has described its considerable oil discoveries in offshore Guyana as high-quality crude, which is typically used in the industry to describe low API gravity, low sulfur content oil. The crude oil pumped from Brazil’s pre-salt fields is typically extremely low sulfur content medium to light oil. Brazil’s medium sweet Buzios and Lula crude oils, which have API gravities of around 28 degrees and sulfur content of 0.3% have proven particularly popular in China. That explains why data from China’s Customs Administration shows that by September 2020 Brazil was the third-largest supplier of crude oil to the world’s second-largest economy. Low sulfur oil from the U.S., Nigeria and the United Arab Emirates are also proving popular among Asian refiners.
While Brazil and Guyana will profit from the rising demand for lighter sweet crude oil, it will impact other South American jurisdictions, notably Venezuela, Colombia, Ecuador, and Peru. All four Andean countries produce predominantly heavy sour crude. The API gravity for Venezuela’s crude oil ranges from around 25 degrees to as low as 8 degrees with sulfur content being between 1% and 2.8%, meaning they are particularly heavy and sour. That makes them unpopular refinery feedstock wherever stricter sulfur content regulations are being established. Buying Venezuelan crude is further complicated by U.S. sanctions, steadily diminishing production, and failing infrastructure. Colombian crude blends are also heavy and very sour. The three main benchmarks; Castilla, Magdalena, and Vasconia possess API gravities of 17.7, 19.4, and 23 degrees respectively, along with sulfur contents of 1.83%, 1.65%, and 1.09%. The same can be said of Ecuador’s principal crude oil varieties Napo and Oriente, which have API gravities of 16.8 and 23.6 degrees along with a sulfur content of 2.33% and 1.61% respectively.
Those attributes, coupled with high breakeven costs in both countries make them less appealing jurisdictions compared to Guyana and Brazil for investment by international oil companies. It is claimed by the National Resource Governance Institute that Colombia’s private oil producers have after-tax production costs of $40 to $45 per barrel, whereas Ecuador’s breakeven price is estimated to average $39 a barrel. That means in an operating environment where oil is trading at lower than those prices, companies are pumping crude at a loss. This is compared to offshore Guyana where the CEO of Hess Corporation stated earlier this year that production in the Stabroek block, where it has partnered with Exxon, breaks even at $35 per barrel. For Brazil’s Northeast offshore oil fields the average breakeven price is even lower, estimated by the National Resource Governance Institute at $28.45 per barrel, although production from offshore Atlantic Brazil, where the pre-salt oil fields are located, breaks even at $45.50 a barrel. Brazil’s national oil company Petrobras earlier this year indicated that its breakeven price was $21 per barrel, indicating that is operations are still cash flow positive even after the latest pullback in oil prices.
The ongoing push for ever-lower content sulfur fuels and tighter sulfur emission regulations globally reduces the attractiveness of heavy sour crude oil for refiners. That will cause price spreads to widen, placing greater pressure on the profitability of oil companies focused on producing heavy crudes in jurisdictions such as Colombia and Ecuador. It will eventually weigh on investment in those countries as energy companies focus on boosting light sweet crude oil reserves and production.
By Matthew Smith for Oilprice.com
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Matthew Smith
Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…
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