Oil demand from China has been one of the few bright spots for a global petroleum industry severely impacted by a long-term global supply glut and the economic fallout from the COVID-19 pandemic. The world’s second-largest economy hunger for energy keeps growing despite the global COVID-19 pandemic and a resultant sharp decline in global economic activity during 2020. Data from China’s General Administration of Customs show oil imports for January to November 2020 grew by 9.1% year over year to an average of 13.5 million barrels daily. The top five suppliers of crude oil to China during the period were Saudi Arabia, Russia, Iraq, Brazil, and Angola. Despite weaker global energy demand, primarily because of the COVID-19 pandemic and related lockdowns, China’s demand for energy is expected to continue soaring during 2021. Even recent oil discoveries, estimated to hold 1.5 billion barrels of crude oil and growing domestic oil production, will not reduce demand for petroleum imports. A key reason is despite the fallout from the pandemic sharply impacting the economic performance of many countries around the world, China’s economy is returning to growth. The IMF estimates that the world’s second-largest economy will expand by 1.9% during 2020 and gross domestic product will grow 8.2% in 2021. That notable economic acceleration will drive greater oil and natural gas consumption in China, which is laboring to obtain enough fossil fuels to meet rising demand and maintain strategic reserves. During November 2020 China’s government increased the 2021 non-state oil import quotas by 20% and overall imports are expected to rise by 6% to 8%, potentially even greater as the economic recovery accelerates. It is anticipated China, which is the world’s second greatest producer of refined petroleum products behind the U.S., could become the world’s largest refiner by 2025 with 20 million barrels per day of capacity. The industry expectation is that during 2021 alone refining capacity in the world’s second-largest economy will expand by almost 3% year over year to around 18 million barrels per day.
While Russia and Saudi Arabia continue to jockey for the top spot among China’s suppliers of crude oil, this is good news for many South American oil-producing nations, particularly Brazil which have been severely impacted by sharply weaker oil demand. China is the world’s largest importer of crude oil and accounts for nearly half of South America’s crude oil exports. By September 2020 Brazil had overtaken Iraq to become the third-largest supplier of crude oil to the world’s second-largest economy. That can be attributed to the attractiveness of Brazil’s sweet medium crude oils, notably the Lula and Búzios grades, produced from Latin America’s largest oil producer’s pre-salt oilfields. Those crude oil grades possess characteristics that make them highly appealing to refiners for processing into high-grade low sulfur content fuels, especially since the introduction of IMO2020 which substantially reduced the sulfur content of maritime bunker fuel. As the world’s largest exporter and a key global shipping hub, China is a major supplier of maritime fuels. Soaring demand from Asian refiners for sweet crude oil grades is a key driver of Brazil’s expanding pre-salt oil boom as well as its continued resistance to the severe economic fallout triggered by the pandemic and sharply weaker energy prices.
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Another key regional beneficiary of China’s insatiable appetite for energy and growing thirst for light to medium sweet crude oil varieties is Argentina. Latin America’s third-largest economy was engulfed in yet another economic crisis as the COVID-19 pandemic began. Those events had a sharp impact on Argentina’s hydrocarbon sector and the burgeoning oil boom developing in the Vaca Muerta, which Buenos Aires sees as a silver bullet for the country’s economic problems. The importance of the developing shale oil and natural gas boom in the Vaca Muerta saw Buenos Aires implement a min minimum domestic price of $45 per barrel to help protect oil companies operating in Argentina. By May 2020, Argentina’s oil production (Spanish) had plummeted to an average of 445,605 barrels daily but since then has risen by just over 6% to an average of 445,605 barrels daily during November, although that number was marginally lower than a month earlier. Natural gas output, however, plunged appreciably during November, losing 8% month on month and falling 10% compared to May 2020.
Source: Argentina Ministry of Economics and U.S. EIA.
Argentina’s rig count, which is a good de-facto measure of activity in the hydrocarbon sector, continues to climb. According to Baker Hughes by the end of November 2020 there were 26 active drill rigs or five more than a month earlier, although this was less than half of the 55 operational rigs during that period a year earlier.
Source: Baker Hughes and U.S. EIA.
Importantly, especially when the expectations attached to the Vaca Muerta shale oil and natural gas play are considered, fracking activity is roaring ahead. According to a December 2020 S&P Platts article, there were 545 active frac stages in the Vaca Muerta by the end of November compared to 345 in October, representing an extremely healthy 58% increase. After the latest oil price rally, the international benchmark Brent is trading at $51 a barrel, well above the $45 per barrel price floor established by Buenos Aires for the domestic Criollo barrel. For as long as Brent trades higher than the local crude oil reference price, it substantially reduces the financial burden for a financially stretched and fiscally fragile central government.
Importantly for Argentina, particularly considering China’s growing thirst for sweet crude oil grades, its main petroleum variety Escalante is a high-quality sweet medium to heavy crude oil. It has an API gravity of 24.1 degrees, an extremely low sulfur content of 0.19%, and a pour point of minus six degrees Celsius. Some of those qualities are superior to Brazil’s Lula and Búzios crude oil varieties, which because of their popularity in China for producing high-quality low sulfur content fuels sell at a premium to Brent. The Vaca Muerta primarily produces a lighter but sourer grade of crude oil known as Medianto, which has an API gravity of 34.9 degrees and sulfur content of 0.48%. Demand for sweeter crude oil grades is growing because of the global push to reduce the sulfur content of fuels and ease of refining compared to heavier sourer crude oil varieties. The rising popularity of Escalante among producers of maritime fuels is illustrated by reports of the United Arab Emirates importing Escalante to meet growing demand from its refineries to produce low sulfur bunker fuel.
China is already a significant trade partner with Argentina. During 2019 the world’s second-largest economy received 10.5% of the Latin American country’s exports by value, the second-largest amount by value behind Brazil. China’s growing demand for energy and the need to boost crude oil imports to meet steadily rising consumption will be a key driver of South America’s oil boom, particularly as the world’s second-largest economy seeks to ensure its energy security by maintaining strategic oil reserves. This will particularly benefit those countries in the regions such as Brazil and Argentina that produce particularly sweet crude oil grades that can be easily and cost-effectively refined into extremely low sulfur content gasoline, diesel and fuel oil. The latest developments also explain Beijing’s growing push to build stronger trade ties with oil-rich countries in South America.
By Matthew Smith for Oilprice.com
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