Real oil is more diverse than exchange oil

Real oil is more diverse than exchange oil

After the 6th of March, 2020, when the ministers of countries participating in the OPEC + agreement were unable to agree on the continuation of the deal, thousands of comments burst out on this subject. But surprisingly, several factors have not been taken into account in the numerous analyzing attempts. When considering the situation on the world oil market, one cannot ignore a “factor” such as China, which for several years has not only been the world leader in oil imports, but is also confidently demonstrating the highest growth dynamics in said imports.

Another strange comment has already been made: many rightly call the head of Russia’s largest oil company Rosneft, Igor Ivanovich Sechin, the “main opponent of Russia’s participation in the OPEC + agreement” without even trying to figure out the reasons why he didn’t like this deal. Theoretical discussions about the fact that Sechin has an acute personal hostility towards the shale mining sector in the United States look completely frivolous. What sounds even more helpless is the version according to which “this insidious man manages to lure Russian president Vladimir Putin who, acting solely from his friendly dispositions towards Sechin, with no hidden agenda, without even being aware of any information whatsoever, forbade the Russian Minister of Energy, Alexander Novak, from signing the new terms and conditions of the OPEC + deal.” This is some astronomical level of analytics going on here.

Different kinds of oil

In order to understand the causes and possible consequences of what is happening on the world oil market, one shall recall factual events that happened not so long ago. 99% of the writings on the price war going on in the KSA (Kingdom of Saudi Arabia) – USA – Russia triangle only talk about what happened with the WTI, Urals and Arab Light oil varieties. Before we recall what an actual list of oil varieties looks like, here’s a few words about what oil varieties and their main characteristics are.

Oil varieties are a way of dividing oil coming from different fields based on its qualitative characteristics and chemical composition: density, presence of certain impurities, sulfur content and groups of alkanes. Alkanes are molecules consisting of carbon and hydrogen atoms in which carbon atoms are connected only by simple chemical bonds. In the periodic table, carbon is denoted by the letter “C” and hydrogen, by the letter “H”.

СН4 is methane, C2 H4 is ethane, C3 H8 is propane, C4 H10 is butane, and so on. The number of carbon and hydrogen molecules in alkanes is derived by a simple formula: Cn H2n+2. In order to somehow simplify the procedure of inventing names for alkanes, chemists agreed among themselves to pay attention only to the number of carbon atoms: in Latin, “penta” means five, and thus the alkane with formula C5H12 is called pentane. “Hexa” means six in Latin, and thus the С6Н14 alkane is called hexane. It goes on following the same pattern: heptane, octane, nonane, decane, undecane, dodecane, tridecane, tetradecane, etc.

Why is it important to know what alkanes are contained in a particular oil sort? Although they are made of the same chemical elements, different amounts of these elements determine the different melting and boiling points, and this is precisely what the technology of oil refining depends on. Different technologies imply different equipment, different costs of production lines at oil refineries and petrochemical plants. And this, in our capitalist world, is extremely important. “Oil” is a term for stockbrokers; companies who own refineries, there is no such thing as just “oil” as they operate with oil of various grades such as Urals, Dubai Crude, Arab Light, ANS and so on. For most people, there is little significance in these different oil names. But for professionals of the oil world, these names are followed by an abyss of important information.

API gravity, or the “Real America”

The most important characteristic of oil is its density: the lower the density of crude oil, the easier and cheaper its processing. The higher the quality of the resulting petroleum products, the more money, the more money there is to get from a cubic meter of “black gold”. Back in those wonderful times when the world oil market with its USD currency interested us “in so far as”, oil was quite easily divided based on density:

  • Density of up to 780kg per cubic meter: super light (gas condensate)
  • Density of 780 to 820kg per cubic meter: extra light
  • Density of 820 to 870kg per cubic meter: light
  • Density of 870 to 920kg per cubic meter: medium
  • Density of 920 to 1000kg per cubic meter: heavy
  • Density of over 1000 per cubic meter: extra heavy (bitumen)

All measurements are taken at a temperature of 4°C, because it is the temperature at which 1 cubic meter of water weighs exactly one ton. Nothing tricky here: everything is logical and understandable.

Standards have been developed ever since 1924 by the American Petroleum Institute. In the world oil market, the API degrees unit is used to differentiate oil based on its density. Here is what this division looks like:

  • Super light: density of over 50° API
  • Extra light: density of 41.1° to 50.0° API
  • Light: density of 31.1° to 41.1° API
  • Medium: density of 22.3° to 31.1° API
  • Heavy: density of 10° to 22.3° API
  • Extra heavy: density below 10° API

The second most important characteristic of oil is its sulfur content. Environmental standards are gradually becoming tougher on the sulfur content in all types of motor fuel. The consequences of this are that oil refineries and petrochemical plants have to equip themselves with additional machinery for sulfur removal. Sulfur is found in oil not only as a separate chemical element, but also as a part of various chemical compounds. We will not go in details on this matter for now, but we will point out the main idea: the higher the sulfur content in oil, the more expensive its refining. It may sound funny, but nowadays we can still find the words “sweet” and “sour” being used to describe oil on specialized websites. This terminology could have possibly been developed in that very API we are talking about, since if people are able to measure density in degrees, why not taste the oil as well? Jokes aside, “sweet” oil contains significantly less that 1% sulfur, whereas “sour” oil contains about 1-2%.

There are only two main parameters when it comes to oil, but these are already enough to cause a general confusion in the prices of individual grades. Light oil with a high sulfur content may be cheaper than a heavy, but not sour: this is a classic case, the case of Arab Light oil produced in Saudi Arabia and Russian Urals grade oil. Saudi oil wins in density: 34.00° API versus 31.70° API for the Urals, but sulfur content in the Urals is of 1.25%, whereas the Arab Light is at 1.78%. As a result, these two grades of oil compete with each other, and refineries, whose production lines are built for Urals processing, are not very willing to buy Arab Light precisely because of the increased sulfur content in the latter. When reading Saudi Aramco’s statements on how they intent to “squeeze Russian oil out of Europe”, there is something to be read between the lines: “We will offer discounts that will make Arab Light processing more economical than Urals processing”. Saudi Aramco has no other way to compete with Russian oil companies that supply Urals to the European market, even though we are talking about a heavy and a light oil grades. The physical and chemical properties of different types of oil do have a very serious effect on numerous things, including price wars on the world oil market.

Benchmark crude oils

There are more than a hundred varieties of oil being produced in the world and it is obvious that all existing grades cannot be traded on exchanges. In order to preserve their mental health, marker crudes were introduced in world trade (they are what we call “benchmark crudes”) in order to serve as reference. Currently, there are only three of them: WTI, Brent and Dubai Crude.

The Brent variety is produced in the North Sea and was named after the field it is being extracted from. As the Brent field was developed, the variety became a mixture of oil produced in four groups of fields: Brent, Forties, Oseberg and Ekofisk, all located in the British and Norwegian sectors of the North Sea. Brent oil production currently accounts only for 1% of the world production, and therefore there is more and more talk about removing it from the list of reference oils. Such a thing has already been done, though: in its early days, OPEC used its own benchmark of 12 different types of oil produced by countries that were members of the cartel, but now the OPEC Reference Basket is not being recalled very often. Brent has become a reference brand because of the reliability of supply, the presence of several independent suppliers and the willingness of many customers to purchase it. Brent is listed on the London ICE Futures Exchange and serves as a benchmark for all types of oil traded in Europe. The density of Brent crude oil is of 825-828 kg per cubic meter, or 38.60-39.00° API, with a sulfur content of about 0.37%.

WTI, West Texas Intermediate (formerly Texas light sweet) is the USA’s standard not only for its own produced oil, but also for oil being supplied to it from other regions. “Texas Sweet Sweet Oil” has a pretty self-explanatory name: it has a density of 827 kg per cubic meter (39.60° API) and a sulfur content of about 0.24%. It is listed on both the New York NYMEX Exchange and the Singapore SYMEX Exchange. The volume of WTI oil production accounts for about 1% of the world production, but this does not prevent this grade from remaining a marker. This can be explained by the fact that there are several dozens of oil types being extracted in the United States, which makes WTI really is in demand for organizing exchange trading.

Dubai Crude has become the benchmark for pricing all grades of oil produced in the Gulf region and exported to Southeast Asia. With a density of 31.0° API and a sulfur content of about 2%, t is listed on the UAE Dubai Mercantile Exchange, and on the Chicago CME Exchange since 2015. Oddly enough, not many know of the Dubai Crude standard, even though over 30 million barrels of its oil are being sold daily, which accounts for 30% of the world production.

Until 2007, WTI was the leading exchange, then the palm went to Brent, and now all other grades of oil are traded either at a discount or at a premium to this grade. It is believed that this is “an exclusively market mechanism”, but in reality the price of oil varieties depends not only on quality, but also on the fact that it has nothing to do with the free market, that is, on discriminatory measures taken by the dollar holder in relation to some other countries. Another important point is that the main percentage of all transactions on exchanges lies in futures contracts oriented on future deliveries, usually with a delay of one month from the moment of conclusion. When studying stock exchanges, one has to keep in mind that 95% of stock trading is actually futures trading, and trading at current (spot) prices accounts for no more than 5%. Usually, the discount of the current Brent oil price to the nearest futures term is from 0.4 to 0.6 US dollars per barrel.
There are no refineries in the world that would stick to only one oil grade as its raw material. In order to get a maximum profit, refinery owners strive to achieve the largest possible range of products, from gasoline with a large octane rating to tar as a building material for road works. A classic example is the USA, which not only exports but also imports oil: light grades are exported, heavy grades are imported. China imports both light and heavy grades of oil: given the huge volume of road construction in the country, the import of heavy grades of oil is highly required. Russia does not obey this rule for the very reason we mentioned at the beginning of this article: its resources are more than just Urals. Russia is not the only one in such situation: for instance, Iran produces Iran Light and Iran Heavy, which are enough to fully ensure the refineries operating there.

The mystery of the “oil quadrangle”

Now that we have taken a look into the world of actual oil, we can try to analyze what is going on in the mysterious KSA – USA – Russia – China quadrangle. There are three supplying countries to the Chinese oil market, which is becoming more and more attractive every year, with several varieties chosen in such a way as to best meet the demand of China’s oil refineries and petrochemical plants. Another surprising fact is that when comparing the oil sector of KSA, the USA and Russia, in the vast majority of cases, only the volumes of oil production in these countries are taken into account (moreover, without it being detailed by grade). The States produce the most oil in the world, but in 2019 they were only able to export 2.2 million barrels per day, which is about 800 million barrels per year. The KSA ranks third in the world, behind the US and Russia, but its export volumes are completely different: 347 million tons, or 2 560 million barrels in 2017, and 367 million tons or 2 700 million barrels in 2018. Russia ranks second in terms of production, but it is significantly behind to the KSA in terms of exports, yet ahead of States in exports even though they produce more than Russia. The volume of oil exports from Russia in 2017 amounted to 257 million tons (about 19 billion barrels), and in 2018, 257.7 million tons.

But this is not all. To find data on how much oil American, Saudi and Russian companies produce outside of their countries can only be done through complex «investigative measures». Rosneft operates in Venezuela, Lukoil in Uzbekistan, Gazprom Neft in Iraq, and the barrels produced there are not included in the statistics of Russian production and exports. Same thing applies to to Saudi Aramco, and to ExxonMobil and Chevron. But this is not unusual in the oil sector, where “openness and democracy” are out of the question. Those who like to criticize Russia for the constant discrepancy between its data on oil exports and the data of importing countries also mischievously “forget” to mention that this is a common practice that developed long ago. Even back in Soviet times, no one outside the USSR could provide exact data on oil production and export of that country. Nowadays, in a time when registering granddaughter companies abroad has become a simple procedure, when each year are created new consortia that work in different regions of the planet on the basis of production sharing agreements for certain fields, provide exact data is impossible not only for Russia, but also for any other country. When considering how the USA, KSA and Russia are “fighting” for the Chinese oil market, this data is impossible to take into account, and thus the analysis cannot be accurate by definition, and only general trends can be caught.

The armament of the price war on the world oil market

Let’s start with the obvious: we shall try to rely not solely on statistics, but also on more specific data about which particular types of oil are extracted in the USA, KSA and Russia. Since there is a price war going on between the three countries, one needs to know what the «weapons» of each participant are. This is what oil production in Russia looks like today:

Based on the API standards, ARCO (Arctic Oil) and Urals are medium grades of oil, whereas ESPO, Siberian Light, Sokol and Vityaz are light grades, so things are not as bad as we are sometimes told they are. As of today, Urals and ESPO should be considered as the main types of Russian oil: Urals account for about 83.5% of the total oil production in Russia, and ESPO for about 12.5%. Both projects in Sakhalin are developed by consortia of companies, and the volumes of Siberian Light and Urals are interdependent. The Urals grade is a mixture of light oils from Western Siberia with heavy and sulphurous varieties from Tatarstan and the Volga region. Without these heavy additives we get Siberian Light. So the “philosophy” here is quite simple: if there is a desire to export more light oil, it is necessary to step up efforts to process heavy oil, and this is precisely what the Tatneft company has been successfully doing year after year.

This is what the list of oil grades produced on the territory of the KSA looks like:

The media most often report on Arab Light, which can be explained by the volumes of it being produced at the fields of Ghawar (with an annual volume of 250 million tons, which is about 1.85 billion barrels), Khurais (60 million tons, or 440 million barrels) and Khursaniya (20 million tons, or about 150 million barrels). With the production of extra-light grades of oil, the picture drawn by Saudi Arabia looks mischievous: AXL, despite its name, does not fit for the Extra Light status according to API standards ( since a density higher than 41.10 is required). Note that the densities of the Arab Light and ESPO grades (34.00 and 34.80 respectively) are almost identical, but the sulfur content in Saudi oil is 2.8 times higher (1.78% in AL versus 0.62 % in ESPO). This is a very important point, since this is yet another case where the chemical properties of oil lead to serious geopolitical consequences.

68.8% of Saudi Arabia’s oil exports go to Southeast Asia, and China, Japan, India, and South Korea happen to be among the largest importers. Based on the data for 2018, 252.5 million tons of oil (1.86 billion barrels) were delivered to Southeast Asia from Saudi Arabia, which is almost the same as Russia’s total export volume for 2018 (257.7 million tons). However, ESPO is a «weapon» which Saudi Aramco cannot defend itself against using AL because of a “trifle” such as 1.16% sulfur. But the argument doesn’t lie only in quality, there is also a more ironic argument in favor of ESPO: iron. Literally.

The largest oil pipeline in modern Russia

ESPO stands for Eastern Siberia — Pacific Ocean; this is what the main oil pipeline is called. It has two phases: ESPO-1 and ESPO-2. ESPO-1 was laid along the Taishet-Skovorodino route, from the Irkutsk region to the border with China in the Amur Region. ESPO-2 connects Skovorodino and the Kozmino spemornefteport in the Primorsky Territory near Nakhodka. The total length of the ESPO is 4748km.

On November 27th, 2019, Transneft brought ESPO to its full capacity, and now ESPO has the opportunity to pump 80 million tons (590 million barrels) of ESPO grade oil annually, 66 million tons of which (480 million barrels) are to be exported, which is a quarter of the volume Saudi Arabia delivered to SEA. Russian media paid very little attention to the ESPO: throughout 2019, the trend was focused on new Russian gas pipelines, especially Nord Stream-2. However, the length of NS-2 is about 2100 km, whereas the length of the ESPO is 2.25 times greater. Here’s a quote taken from the official website of Transneft:

“As per the original plans, the project was to be completed by 2030, but because of the high demand for this delivery route among petroleum companies, Transneft decided to finish the works within record times, ten years ahead of the schedule”

A project of such magnitude being completed ten years ahead of the schedule would have been an all-Union sensation in Soviet times. Nowadays, it only appears in the lines of short news bulletins, and nothing more. Even if we approach the assessment of SP-2 and ESPO from a “purely capitalistic” point of view, here too, the comparison will be in favor of the “brainchild” of Transneft. Let’s imagine that gas prices in the European market rise to $150 per 1000 cubic meters, that NS-2 will be completed and will operate with a maximum capacity of 55 billion cubic meters over the next year. In this hypothetical case, NS-2 would provide Russian exports $8.25 billion, which is a substantial amount. Now let’s make a more pessimistic assumption regarding the price of oil: ESPO’s export opportunities will be fully utilized, but Brent will not rise above $25 per barrel. The usual ESPO premium relative to Brent is about $5 per barrel, in which case the sale of 480 million barrels of ESPO would provide Russian exports $14.4 billion, while simultaneously providing for refineries in Khabarovsk and Komsomolsk-on-Amur. In short, the ESPO value for the Russian economy is several times higher than the value of NS-2, both in terms of export and in terms of supplying oil products to the Far East.

An outline of the main pipelines of Transneft

We know the names of pipe-laying ships and companies operating and financing NS-2 and we are familiar with the statements various politicians have made on this subject. And yet at the same time, calmly and gradually, the ESPO is following its route through Siberia, through rocky and sandy soils, through swamps, through the taiga and through dozens of rivers and streams, in the summer heat and in winter frosts. There are deliveries not only to China, but also to Japan, South Korea, Malaysia, Singapore, the United States, New Zealand, the Philippines, etc. Here is a brief description of the linear part of the ESPO-1: Taishet — Ust-Kut — Talakan field — Lensk — Olekminsk route — Aldan — Tynda – Skovorodino, which amounts to 2694 km. 550 km of permafrost, 300 km of wetland, 740 km of rocky and landslide areas, temperature drops from 50°C to -50°C, areas of increased seismic activity (up to 9 points), a complete lack of infrastructure on most of the route, with the Talakanskoye field — Aldan section to which equipment and cargo could only be delivered by river during a navigation period of 2.5 months per year. There are passages under the currents of the Lena, Angara, Aldan, Ust-Ilim reservoir, under dozens of “small” Siberian rivers which could be considered as most powerful water arteries if they were located in Europe. The construction time for all this lasted from December 2009 to December 2012: 3 years.

The almost uninterrupted construction of ESPO-2 began on January 13th, 2010, with 2047 km of the linear part of the route being laid down by September 9th, 2011, two years ahead of the date that was originally planned. What happened during the rest of the time? The route was completely electrified, broadband Internet was run along it, additional pump stations were built, another part of the pipeline was laid (from Taishet to Kuyumba in the Krasnoyarsk Territory with a length of more than 700 km), new pump stations were built along 1,300 km of the Omsk — Irkutsk and Krasnoyarsk — Irkutsk pipelines, 35 bridges were built across rivers of the Irkutsk Region and Yakutia, and 4 bridges along the route to the refinery in Komsomolsk-on-Amur. 1800 km of highway routes were laid, 28 residential buildings for employees who work at the pump stations were build, and so on. This is indeed a grand construction in which a total of more than 40 thousand people were involved, and which resulted in the creation of nearly 10 thousand jobs in those regions where things were uneasy back in Soviet times. Yet there was only minimal information about all this in the federal media, even though the only thing that can be compared with the ESPO is the Druzhba oil pipeline, the construction of which was an All-Union shock construction project and which the whole country knew about in great detail.

For now, we shall leave the story of ESPO and go back to the main focus the main topic of this article and point out a few basic facts. With the introduction of the ESPO working at its full capacity, Russia is able to export up to 480 million barrels of ESPO oil per year to China and Southeast Asia, which amounts up to a quarter of the annual supply of oil from Saudi Arabia to this same region. At the same time, ESPO is superior in quality to Arab Light, ESPO is delivered by pipeline, whereas Arab Light is delivered only by tankers, hence the obvious competitive advantages of Russian oil. ESPO enables Russia to double export of light oil, and ESPO’s share in total exports may increase from 12.5% to more than 25%.

Of course, this is completely different from deep processing of oil, but, nevertheless, can lead to an increase in revenues to the state budget. We shall also recall that Urals is trading at a discount of $5 per barrel compared to Brent prices, while ESPO is a premium grade to Brent for $5 per barrel. At the same time, there is a demand for Urals in Southeast Asia, and if Russian oil companies can increase its production and solve logistical issues, it will be possible to increase exports of heavy grades as well. “Grades” being written in plural form is an excuse for us to someday go over how things are going for LUKOIL and Gazprom Neft in Iraq.

Two parties of the price war, the KSA and Russia, are “armed” with both light and heavy grades of oil. It is left to see how things are in the USA, and we will proceed from the hypothesis that its shale production will not decrease. Here, we come across an amazing paradox: there is no heavy grade oil in the US. Oil produced in Alaska is an ANS grade with a density of 31.90° API and a sulfur content of 0.93%, traditional oil produced in the US mainland is of WTI grade with a density of 38.70° API and a sulfur content of 0.24%. When it comes to shale oil, the Bakken grade was introduced with a density of 39.0°API and a sulfur content of 0.18%. The result is surprising: in the free competitive world markets, the States cannot oppose neither Arab Heavy nor Urals, and it can only compete with the KSA and Russia in the light sector.

There’s a grain of truth in every joke. The leaders do not feel like joking, and since there is no way to compete on a market basis, they simply cancel the market basis of the global oil sector. Many people call this “US sanctions”, but apparently, such terminology can only be heard in the mouths of the wicked ones. Only the UN Security Council has the right to apply sanctions to a particular state, and what the United States are doing in relation to Russia, China, Iran, Venezuela, is called “unilateral illegal discriminatory measures”. That’s it for how these measures were related to the world oil market. We shall discuss their result in the next article.

Translated by Ellina Hensen
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