Saudi Aramco to skip diesel term imports on delivered basis

State oil giant Saudi Aramco

will skip diesel term imports on a delivered basis, removing a huge chunk of demand from the Asian and Middle East oil markets and potentially reducing refinery margins, industry sources said on Wednesday.

The company is skipping term imports of diesel on a delivered basis this year for the first time after years of tying up contracts with sellers to import at least about 2.2 million to 3 million barrels a month of the oil product.

Cargoes chartered on a delivered basis means the seller usually pays the freight charges to deliver cargoes to the buyer.

Aramco might instead focus on tying up term contracts on a free-on-board (FOB) basis with sellers like India's Reliance Industries, though this is not certain and overall term volumes will be much less than past years, the sources said.

The company usually ties up term contracts on both delivered basis and on a FOB basis.

The move is a further sign that top oil exporter Saudi Arabia is becoming self-sufficient in meeting its diesel needs after the start-up of the new Saudi Aramco Total Refining and Petrochemicals Co (SATORP) refinery in Jubail, a joint venture with Saudi Aramco and Total .

"Once SATORP started production, it really changed the dynamics," a Gulf-based trader said.

Many refineries in Asia and the Middle East depend on Saudi Arabia's diesel imports to absorb excess cargoes in the region. With a significantly reduced demand from Saudi Arabia and even exports from its refineries, traders are worried the supply glut in Asia will pressure refinery margins.

SATORP, the first of a trio of 400,000-barrel-per-day (bpd) refineries due to open over the next four years, started diesel production in the second half of last year and has exported the fuel to Kenya. It is also expected to meet domestic diesel needs from the new refinery.

Exxon Mobil Corp earlier sold gasoil cargoes through a rare term tender from its joint-venture Saudi Aramco Mobil Refinery Co (SAMREF) refinery in Yanbu.

Gasoil from SAMREF, which is a joint venture between Exxon Mobil and Saudi Aramco, is usually sold within Saudi Arabia, with occasional spot cargoes offered for exports.

Saudi Aramco imported on average about 7.5 million barrels of diesel each month from January to October last year, with record volumes of nearly 11 million in July, government data published from 2002 through the Joint Organisations Data Initiative showed.

Of this, the company normally buys 2 million to 3 million barrels in the off-peak period and about 5 million to 6 million in the peak summer period through its delivered term contracts, with the rest on an FOB basis or in the spot market, traders said.

IMPACT REMAINS TO BE SEEN

While a major term diesel buyer is removed from the market and could pressure refinery margins in the short term, the long-term impact remains to be seen, traders said.

"They don't normally buy a lot of cargoes during winter, so they probably can fill their shorts from the new refineries or other existing refineries, but once it's summer or if there are any refinery issues, then we might see a buying spree by them," a Singapore-based trader said.

Saudi Arabia has historically been short of gasoline and gasoil. Its petro-dollar fuelled economy and growing population have rapidly driven up internal demand, especially when power generation surges in the hot summer months from May to August.