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West African crude trade trends and their impact on regional producers

By Arjun Chopra, Agnieszka Kloskowska, and Alan Martin

Between 2011 and 2014, North American demand for crude from West Africa went down by 1.2 mb/d. But where has it gone and what does it mean for regional producers?

In the past few years, increasing domestic crude production in North America has rapidly reduced the high volumes of West African crude imports into the country: between 2011 and 2014, US and Canadian demand for crude from West African producers went down by 1.2 mb/d. This was primarily driven by the rise in US light tight oil production, which surged by 2.2 mb/d over the same period.

Despite the expectation that those volumes would be redirected eastwards, the actual increase in Asian imports of West African crude was relatively modest. It seems there were two major reasons: falling production of the crude and redirection of some of its exports to other regions, most notably Europe.

Crude production in West Africa went down by 0.3 mb/d between 2011 and 2014, with almost all of the decline attributable to Nigeria, which was affected by both oil theft and infrastructure attacks as well as natural production declines. This was exacerbated by the lack of new investments due to the uncertain regulatory environment—a new bill originally proposed in 2008, but yet to be implemented, could worsen the fiscal situation for the oil and gas industry. While lower domestic refinery runs somewhat mitigated the impact of lower production on exports, net exports from West Africa still declined by 0.2 mb/d between 2011 and 2014.

At the same time, increased volumes of West African crude leaving the region found a home in Europe. Despite Europe—with its falling refinery utilization—reducing its total crude imports by over 1 mb/d between 2011 and 2014, West Africa was one of very few regions which exported more to Europe over that period. This was mainly driven by the substitution of falling supply from sources like the North Sea or Russia. As a result, West African crude flow into the region increased by 0.4 mb/d in the 2011–2014 period.

Lastly, West African crude flows to other regions went up by 0.2 mb/d between 2011 and 2014. One of the main outlets was Brazil, which continued to increase refining capacity faster than crude production and, therefore, boosted imports.

As a result, the 2011–2014 increase in exports of West African crude to Asia was limited to 0.5 mb/d—less than half of the volume which would previously have been exported to North America. Countries which seem to have taken the most advantage of the additional supply in the market were China and India, which collectively accounted for 87 percent of the increased volumes into Asia.

West African crude has been redirected from the US mainly to Asia and Europe.

Looking forward, West African crudes will most likely remain the marginal flow connecting the Atlantic and Pacific basins, with volumes swinging between Asia and Europe. This may have a significant impact on crude producers in West Africa. Since the freight rate to Europe over recent years has typically been at least around 80 c/bbl lower than that to Asia, this is a potential value component that a producer can achieve for volumes directed toward this market. Therefore, it could be beneficial for African crude producers to focus on securing term crude outlets in Europe, even if they have to share a portion of this freight rate differential with the refiner. One way of securing such outlets would be to lock in volumes to Europe via term supply contracts with discounts to delivered prices, thereby avoiding the higher freight rates for sending the barrels to Asia. For refiners, on the other hand, this would mean monetizing the value of their secured put to the producer.

Alternative arrangements could be structured around term crude toll-processing agreements, whereby the crude supplier effectively rents some of a refinery’s processing capacity at a processing fee which shares the value between both parties. The producer retains title to the crude through the refinery and physical product offtake can be agreed or be on a deemed basis.

Since the current difficulties for European refining are expected to get progressively worse over the next few years, opportunities for crude suppliers to secure these types of contracts may be limited. Therefore, those West African crude producers who start to look at the options early will have an advantage over those who do not.

About the author(s)

Arjun Chopra is an analyst in the McKinsey Knowledge Center in Gurgaon; Agnieszka Kloskowska is a specialist in the London office, where Alan Martin is a senior expert.