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S Korea's S-Oil seals fuel oil term deal, first cargo to arrive H2 June

Singapore (Platts)--12 Jun 2018 108 am EDT/508 GMT


South Korea's S-Oil has sealed a term deal to secure the supply of high sulfur fuel oil for the seven months starting June, sources close to the discussions said this week, adding that the first cargo is expected to arrive in the second half of June.

The term supply deal brings S-Oil one step closer to commencing commercial operations at its new 76,000 b/d high-severity residue fluid catalytic cracker, or HS-RFCC, at its 669,000 b/d refinery in Onsan, located on South Korea's southeast coast.

It also marks the refiner's switch to becoming a fuel oil importer from an exporter. The move is significant as out of South Korea's four refiners, S-Oil is the only one that channels its fuel oil production to the bunker fuel sector for sale.

With the switch to becoming an importer, S-Oil will join fellow South Korean refiners SK Innovation, GS Caltex and Hyundai Oilbank, all of which supplement domestic production with imports.

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A source close to the refiner said Tuesday that S-Oil has tied up the term deal with trading house Trafigura for the supply of HSFO over June-December 2018. The contract is understood concluded at a premium of around $10/mt to the Mean of Platts Singapore 380 CST HSFO assessments on a CFR basis to Onsan, with S-Oil having options in terms of the quality of the fuel oil supplied.

While S-Oil used to routinely export one MR-sized fuel oil cargo every one to three months until the end of last year, the refiner will now import one Aframax-sized cargo a month from June based on the term contract, industry sources said.

A Trafigura spokeswoman declined comment Tuesday.

The imported fuel oil will be blended with S-Oil's slurry production from its RFCC units, with the resulting product to be channeled into the bunker fuel market, traders said this week.

Traders have also said that while S-Oil has traditionally been able to offer bunker fuel at prices lower than that of its fellow refiners, this will now come to an end as the refiner will have to price in additional costs associated with imports.

"The commissioning work for the new RFCC unit has been going on for the last month or so, and the operation has been going well," a source close to the matter said Tuesday, adding that the unit will start commercial operations "within this month." "The run rate is uncertain for now, but it may operate at about 70%-80% and then the run rate may be increased within the next few months," the source said.

Information on S-Oil's website refers to the upgrading works as the "SUPER" (S-Oil Upgrading Program of Existing Refinery) project, and states that when completed "bunker C production will decrease and ... ultra low sulfur diesel production will increase about 10%." Industry participants have said previously that S-Oil's production of bunker C are expected to halve. Currently, S-Oil produces around 200,000 mt of bunker fuel on a monthly basis, South Korean traders estimated.

Earlier in March, S&P Global Platts reported that despite the impending change, South Korean traders do not expect much impact on the bunker fuel market as the industry has been aware of the refinery upgrading work for some time now, and that reactions to the move would have been priced in by now.

But what will change going forward is that S-Oil's premiums for bunker fuel are set to increase, South Korean trade sources said, as import costs relating to shipping and storage, among others, will now have to be factored in.

South Korea's annual bunker fuel sales volume are estimated at around 8.5 million-9 million mt.

S-Oil, which is 63.4% owned by Aramco Overseas Co., a subsidiary of Saudi Aramco, has three crude distillation units at its Onsan refinery complex, namely the 90,000 b/d No. 1, 240,000 b/d No. 2 and 250,000 b/d No. 3 CDU, as well as an 89,000 b/d condensate fractionation unit.

(Updated to add Trafigura declines to comment in paragraph 7)

--Clarice Chiam, clarice.chiam@spglobal.com
--Atsuko Kawasaki, atsuko.kawasaki@spglobal.com
--Edited by Irene Tang, irene.tang@spglobal.com; Jonathan Fox, jonathan.fox@splobal.com




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