By Jane Xie
SINGAPORE, April 2 (Reuters) - South Korea's fuel oil imports are expected to touch a record for a third straight year, driven by demand for the heavy oil product as both a refinery feedstock and marine fuel while domestic production declines, trade sources said.
Poor profits from processing a barrel of crude into fuels amid weak demand have either forced refiners to shut facilities across Australia, Japan and Europe or build more complex units, capable of converting low-value oils into more lucrative products such as gasoline and middle distillates.
Export-driven South Korean refiners will spend at least $8 billion in refinery upgrades, fuelling its appetite for cheap feedstocks such as straight-run fuel oil (SRFO).
Following a 60 percent jump in fuel oil imports last year, South Korea has already imported 10.6 million barrels of the heavy distillate over January and February, almost a quarter of last year's total at 44.28 million barrels, data from Korea National Oil Co showed.
"South Korea is all about keeping fluid catalytic crackers (FCC) running at maximum levels while cutting crude runs where possible to deal with poor Asian margins," said Robert Campbell, head of oil products research at energy consultancy Energy Aspects.
"I would expect them to be elevated consumers of SRFO as we don't see strong Asian margins this year on gasoil overcapacity," Campbell said.
SRFO is the first cut of heavy distillate from the initial round of crude processing in a refinery, and can be further refined into lighter products in FCCs.
SRFO IMPORTS
Hyundai Oilbank's first import of SRFO in April and South Korea's largest refiner SK Energy's consistent purchases since the fourth quarter last year indicate a growing baseload of SRFO that will go to South Korea.
SRFO, which can be sourced from Europe, Russia, Middle East, accounted for more than 60 percent of the monthly increase in South Korea's fuel oil imports last year, traders estimated.
South Korea's second largest refiner, GS Caltex, is also considering the possibility of importing more SRFO.
"At this stage, we are weighing the economics and looking into why the other companies are bringing it in," said a South Korea-based source familiar with the matter.
Together, GS Caltex and Hyundai Oilbank have spent more than $3.5 billion in three years to expand their heavy oil upgrading units by more than 123,000 barrels-per-day (bpd), while S-Oil is planning a 50 percent and SK Energy a 10-20 percent ramp up in their heavy oil units to raise gasoline and diesel output.
BUNKER DEMAND
Unlike older, simpler refineries, increasingly sophisticated refineries have an additional outlet - their own secondary units - to further refine fuel oil.
As a result, South Korea's domestic production of fuel oil has declined steadily by more than 2 million barrels each year since 2012.
To date, the country's average monthly fuel oil production is almost 30 percent less than last year's monthly average, KNOC data showed.
The shortfall has been met by a 30 percent increase in imports of marine fuel estimated at close to 300,000 tonnes per month currently, South Korea-based traders said.
"Currently, almost every refiner is short of fuel oil. With more secondary units, they are cracking more than before," said a Singapore-based fuel oil cargo trader.
South Korea-based marine fuel oil traders said bunker demand could also rise on the back of Japanese refinery closures.
South Korean bunker prices are at least $10 a tonne cheaper than Japan, which now has limited supplies due to refinery run cuts and closures.
"We expect increased bunker demand thanks to Japan," a South Korean bunker trader said.
(Additional reporting by Jane Chung in Seoul; Editing by Anand Basu)
((jane.xie@thomsonreuters.com; +65 6870 3495; Reuters Messaging: jane.xie.thomsonreuters.com@reuters.net))
Keywords: SOUTHKOREA FUELOIL/
