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Energy

Exclusive: Saudi Arabia floats change to Japan oil supply, sparks concern

Difficulty in processing high-grade crude highlighted following refinery attack

Aramco's damaged processing facility in Abqaiq, near Dammam in Saudi Arabia's Eastern Province.   © AP

TOKYO -- Saudi Aramco has notified Japan's top oil distributor about a potential change in shipments, stoking concerns about the kingdom's ability to supply crude following attacks on its major refineries a week ago, Nikkei learned Saturday.

State-owned Aramco did not say why it wants to change the oil grade it supplies to JXTG Nippon Oil & Energy from light to heavy and medium, starting in October, JXTG officials said.

But the move indicates that the Saudi national oil company is having a hard time restoring its production as quickly as it has promised, despite repeated assurances that the company's supply would be restored by the end of September.

Two of Aramco's refineries were attacked in what is believed to be a drone and cruise missile strikes on Sept. 14. The attacks, which were claimed by Iran-backed Houthi rebels in Yemen, knocked out more than half the country's oil production.

JXTG officials said they suspect that Aramco is taking more time than expected to repair its desulfurization facility, which is necessary to produce light-grade crude used in the production of gasoline and light gas oil.

Saudi Arabia accounted for almost 40% of Japanese oil imports in fiscal 2018.

Medium- and heavy-grade crude is cheaper to buy, but more costly to process. The shift is likely to result in an increase in retail prices of petroleum products, such as gasoline, in Japan.

The JXTG Holdings unit expects it will have to buy light-grade crude from other suppliers, such as the United Arab Emirates. Its refineries need a certain amount of light-grade crude, as well as medium and heavy grade, to operate smoothly. 

Other Japanese oil distributors, such as Idemitsu Kosan and Cosmo Energy Holdings, have not been notified by Aramco about a change in supply. This suggests that Aramco is trying to test the waters first with its biggest customer in Japan.

The three Japanese distributors have already been told by Aramco that October shipments would be delayed by several days.

Japanese distributors have been scrambling to find alternative supply from other producers, such as Russia and the U.S., in case Aramco's production does not recover as quickly as the company has promised.

"It is difficult to believe that Aramco's production will be fully restored by the end of the month," a JXTG executive said.

The attacks have reduced Saudi Arabia's production capacity by as much as 5.7 million barrels per day, or 5% of the global oil supply. Aramco has said production capacity will return to 11 million barrels per day by the end of the month.

The U.S. blames Iran for the attacks and decided to blacklist its central bank and two other state financial institutions as terror financiers on Friday. Iran denies the charges.

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