Asian Crude Buyers Realize Mexican Oil May Not Have Been Such a Bargain

File image: GS Caltex

By Sharon Cho, Heesu Lee and Tsuyoshi Inajima

(Bloomberg) — A few months after snapping up the most heavily discounted Mexican oil in 20 years, Asian refiners are discovering some of these bargains may have been tainted.

At least two buyers experienced difficulties in processing Mexican crude because of the chloride content, said people with knowledge of the matter who asked not to be identified because the information is confidential. Petroleos Mexicanos is dealing with Asian clients’ claims that a single light-crude shipment had a high amount of the substance, the state producer known as Pemex said in a statement Tuesday.

Buyers in North Asia boosted imports from Mexico as prices for its light oil in February slid to the biggest discount over benchmark grades since at least 1995. Fluctuating quality is a challenge facing refiners in nations such as South Korea that are diversifying crude sources away from Middle East producers amid a global glut. The impurity makes the oil difficult to process, according to industry consultant Vautrain & Co.

“As refineries across the world are designed to maximize economic efficiency by assuming certain crude properties, it will be less economical if crude is bought and processed without considering quality,” said Takayuki Nogami, the chief economist at Japan Oil, Gas and Metals National Corp., a state-run company that helps secure energy supplies. “While diversifying sources is also important, you must give weight to stability, in terms of volume and quality.”

Differences in crude specifications are common because of the presence of water, salt, chloride and other substances, according to Pemex. It continues to export about 70,000 barrels of light crude a day to customers in South Korea and Japan, and the content of the shipment is being carefully analyzed, the company said.

Organic Chloride

“Organic chloride induces a huge problem in processing,” said John Vautrain, who has more than 30 years of experience in the energy industry and is the head of Vautrain & Co. “It does happen from time to time when things get contaminated. But I think it’s premature to say that Mexican crude is actually contaminated.”

Hyundai Oilbank Co. is processing Mexican crude by blending it with other grades, said a Seoul-based spokesman, asking not to be identified because of internal policy. Katsuhisa Maeda, a Tokyo-based spokesman for Japan’s Cosmo Oil Co., declined to comment, as did a GS Caltex Corp. spokesman in Seoul.

Pemex sold Isthmus crude in February to Asian buyers at $7.85 a barrel below the average of the benchmark Oman and Dubai grades. That was the biggest discount since at least 1995. Cosmo Oil booked a tanker to ship 130,000 tons of Isthmus to Japan in May, according to 3 shipping reports this week.

OPEC Challenge

Tankers carrying oil from Mexico docked in South Korea this year for the first time in more than two decades, according to data from state-run Korea National Oil Corp. compiled by Bloomberg. Refiners in North Asia ordered at least eight cargoes from the Latin American nation in 2015, shipping data show.

The high chlorine content in the Mexican crude is “probably a one-time thing,” according to Victor Shum, a Singapore-based vice president at IHS Inc., an industry consultant. “The trend is that there will be more coming after the Asian customers have tried these crudes and now that they have identified the problems.”

The rise in shipments from Mexico to Asia is a challenge to producers in the Organization of Petroleum Exporting Countries, which is seeking to defend its position in its biggest market as the highest U.S. output in more than three decades exacerbates a global oversupply.

Japan relies on the Middle East for about 80 percent for its crude, partly because countries in the region “have a system to supply a large volume of crude with stable quality for a certain period of time,” according to Nogami at JOGMEC.

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