China Just Can’t Get Enough Of This Crude

For an ordinary layman Chad might not come across as an important oil producer. Landlocked, susceptible to political infighting and one of the poorest nations on earth, Chad's oil sector developments might even be unknown for people in the commodity business even though crude makes up 96 percent of the African nation's exports. Chad's flagship crude, the heavy sweet Doba, has been making history lately - for the first time in history, Doba traded above Dated Brent on 19 March, making it the first heavy crude to accomplish this rare feat in 2019. All this adds up to a tremendously illustrative tale about how US sanctions have tilted the balance in world markets and how closely is China's supply safety tied to African oil production.

Against the background of Chad's marred history, full of gory civil war scenes and all too frequent coup d'états, Ndjamena had a tremendous opportunity to raise out of poverty. It knew it had some oil - first deposits were unearthed in the first half of the 1970s, however it could not tap into them (current estimates usually hover around 1.5 billion barrels) because of various conflicts. After the 250kbpd Chad-Cameroon oil pipeline was constructed in 2003, the landlocked nation could finally use a reliable export conduit. Not that it is easy though - Doba has a remarkably high pour point (21°C) which makes it all the more difficult to transport, especially given the 12-kilometer section from the Cameroonian coast to the FSO offshore. Doba is supplied from the Kome-Kribi Terminal in offshore Cameroon, in essence a floating storage offloading facility that can accommodate VLCCs if need be.

To facilitate transportation, ExxonMobil has been using polymer-based pour point depressants to keep the blend marketable. Even though the original Doba crude has an API gravity of 21 degrees and Sulphur content of 0.1 percent, the Chadian crude is currently marketed as a Doba blend, with the addition of a couple of streams that make the final blend lighter, resulting in a 25.8 degree API gravity and 0.09 percent Sulphur content. The above quality is still significantly heavier than Arab Heavy and just somewhat lighter than Basrah Heavy (which, however, because of its Sulphur is assessed in Europe around -6 USD per barrel against Dated). Doba is also heavier but sweeter than the geographically and compositionally relative Congolese Djeno (27° API, 0.3 percent Sulphur) and Sudanese Dar (26° API, 0.1 percent Sulphur).

Throughout the previous years, Doba on average traded at a -3 USD per barrel discount to Dated Brent. Even throughout most of January, Doba was assessed at -2.4 USD per barrel against Dated, however, the onset of US sanctions on Venezuela coincided with a breathtaking growth trajectory for the West African grade. Within a couple of days, Doba grew to -1 vs Dated and traded all of February within the -0.6 to -1 USD per barrel discount interval. This March, amid an ever-tightening heavy supply and fuel oil margins increasing, Doba jumped above Dated Brent and has been around +0.3 USD per barrel ever since. It has to be said that the price jump was not related to any drop in production or exports - actually since December Chadian output was growing, only to fall back a bit in March (see Graph 2).

Historically, Doba has a relatively wide coverage network, with the United States taking in roughly a quarter of past volumes, China digesting some 20 percent, whilst the Netherlands, the United Arab Emirates and India oscillate within the 10-15 percent interval. This year has brought about some significant changes - there have been no movements towards the United States and China has taken up a much more integral part in Doba's market distribution. If you look at the vessels that have left the Kome Kribi FSO this year, you will see the following as destination countries - China, UAE, Netherlands, China, China, China, China, India, Malaysia, UAE, China. The last vessel, DHT Taiga, will also go down in history as something of an achievement - this was the first time the exporter loaded 2MMbbls onto a VLCC in Kome Kribi (usually the ships export 1MMbbl).

China's purchases of West African crudes have reached an all-time high in February and are certain to hit another record high this March. On the back of a February that saw Chinese suppliers buy 1.59mbpd of WAF grades, an impressive feat in itself, trading activity around cargoes arriving to Asia Pacific in March (thus, loading in February at their respective ports) continued to surpass expectations, with Angolan and Congolese volumes being sold in a matter of days, pushing up their values by 1-2 USD per barrel. Since most West Africa's export is heavy or medium sweet, the subregion is ideally suited for IMO 2020 which would make refiners that cannot take in any more Sulphur increasingly dependent on WAF volumes.

Of course, some elements of China, India and South Korea buying record volumes of West African crude are seasonal or related to geopolitical developments. For instance, Chinese refiners will most likely store more crude than usual due to the uncertainty surrounding the US waivers - it remains unclear whether China will be granted the same volume on its Iranian crude import waiver or whether the Trump Administration would prefer to pressurize the Chinese into buying less of it. Similarly, any US tightening of PDVSA sanctions against Venezuela might compel China to alter its import strategy. Yet there is a general trend emerging in front of our very eyes - generally the wider the limitations against the usual exporters of crude to China, the more West African cargoes will Chinese refiners buy.

Chad's oil industry is a peculiar cross-section of how the country works, all the more so after the long-time President Idriss Déby named his son Séïd to head the national oil company, Société des Hydrocarbures du Tchad (SHT). Having worked previously as a director general of Chad's only working (and CNPC-operated) Djermaya refinery, Séïd was instrumental in cracking down at the refinery's Chinese top management for allegedly failing to accommodate Chadian specialists in leading posts there. Exxon, as the only remaining Western major in the country, could speak volumes about the extraction techniques of the Chadian political elite. Chad's finance ministry wanted to get $74 billion from Exxon for reportedly not paying taxes, luckily for the US major the sides managed to settle the claim out-of-court.

Thus, despite the tremendous upsurge in the pricing of Doba, its production will remain hostage to the business climate within the country, which generally tends to protect the President's close circle and not businessmen, all the more so foreign. Production volumes do not really change - Glencore produces some 12kbpd, CNPC around 70kbpd and ExxonMobil about 42kbpd - and are expected to stay around the same figures of 130-140kbpd for the next couple of years, too, as upcoming expansion projects are too short-lived (Glencore's 2018-2025 drilling campaign) or too small (CNPC expected to produce 10kbpd at the Benoy field) to make a genuine difference. The government has been trying to lure investors with an open-door license offering that comprises 24 blocks, yet the risks so far outweigh the benefits, despite Doba's stellar growth.