Brexit may scupper Forties crude oil trade to Asia

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One of the most popular plays in the oil market could be stymied should Britain vote to leave the European Union in June, which would force South Korea, a major buyer of North Sea oil, to rejig a long-standing trade agreement for crude imports.

Under a free-trade agreement (FTA) with the EU that has been in place since 2012, South Korea, Asia’s fourth-largest economy, has become one of the world’s biggest buyers of North Sea oil, still a signficant source of revenue for the United Kingdom.

The deal allows EU exporters to sell their oil to South Korean refineries tax-free, and Britain is the biggest beneficiary of this break.

Britain holds a referendum on EU membership on June 23.

The North Sea supplies 2 million barrels per day, or just below 2 percent of the world’s oil. Close to a quarter of this comes from the Forties field, from which crude is piped to the Scottish terminal of Hound Point and loaded onto ships.

“If Britain officially drops out from the EU, the customs tariff will be raised back to 3 percent, which will likely cause a further decline in crude imports from Britain,” an official at South Korea’s Ministry of Trade, Industry and Energy said.

“However, to minimise such effects, we will consider a separate FTA with Britain, but nothing has been fixed.”

Denmark and non-EU member Norway also extract oil in the North Sea, but Reuters shipping data shows neither country has exported a regionally produced crude to South Korea in the past few years.

BUYING BRITISH BARRELS

According to Korean customs data, Europe accounts for about 7 percent of South Korea’s roughly 90 million barrels a month in oil imports. Most of Europe’s contribution is Forties, Reuters trade-flow figures show.

A barrel of Forties oil BFO-FOT trades at a premium or discount to the dated Brent benchmark and can be impacted by a single fixture for a Very Large Crude Carrier (VLCC) to South Korea appearing on shipping lists or failing to make a voyage. VLCC supertankers are capable of carrying 2 million barrels.

The price of Forties oil, together with the Brent, Ekofisk and Oseberg crude streams, sets the price of dated Brent, the benchmark on which most of the world’s oil trades are based.

“A leave vote would likely generate some confusion and uncertainty rather than a dramatic change,” Energy Aspects analyst Richard Mallinson said.

Mallinson said that while the existing FTA created an additional incentive to UK and other European exporters, the profitability, or arbitrage, of shipping Forties to South Korea was not based exclusively on this.

The economics of the trade hinge on a number of factors, such as freight rates, and the competitiveness of a Brent-linked crude such as Forties, against a more local crude grade based on the Dubai benchmark DUB-EFS-1M.

“It’s the fact that Forties is what you can load at Hound Point onto VLCCs, making it the easiest, most economic North Sea crude to bring on long haul once that arb window opens. The high light-ends yield also makes it attractive to Asian refiners,” Mallinson said.
Source: Reuters (Additional reporting by Rebecca Jang in SEOUL; Editing by Dale Hudson)