Asia has given Iraq's launch of its new Basra Heavy crude oil grade a poor reception after the No. 2 OPEC producer appears to have misjudged demand, supplying too much, too soon.

Sellers of the new grade have struggled to find buyers, with at least one Malaysian-based trader taking a deep discount to offload 2 million barrels, while others have complained about a lack of pre-marketing and slow delivery of technical details to refineries.

The problems, which have increased shipping and marketing costs for term buyers and Iraq's equity partners in its southern oilfields, may hamper the country's efforts to ramp up exports and could lead Asian buyers to look closely at Iranian oil if sanctions are lifted.

"Asian refiners are conservative. You cannot bring new crude overnight and expect it to be taken up quickly," a trader with a western firm said.

Iraq - which sells more than half of its oil to Asia - proposed last year to split its supply into two grades, adding Basra Heavy to its traditional Basra Light.

The move by Iraq's State Oil Marketing Organisation (SOMO) was widely supported by crude buyers who had been dealing with variations in quality of Basra Light as heavier, high-sulfur content oil from newer fields was blended in.

But its implementation this month ahead of first shipments in June has upset both term buyers and SOMO's exploration partners, who receive oil in payment for work done on the southern oilfields, traders say. These include companies such as Lukoil, Petronas [PETR.UL], China National Petroleum Corp [CNPET.UL] and Japan Petroleum Exploration Co (Japex).

SOMO did not respond to a request for comment. The companies declined or were unavailable to comment.

OUTPUT BOOST

Iraq has been trying to boost output to cope with a slump in prices. It allocated over 3.1 million barrels per day (bpd) of Basra crude exports for its June loading program, up from its usual 2.6 to 2.7 million bpd.

This includes 1.22 million bpd of Basra Heavy, nearly double the volume that Iraq had told its partners, while Basra Light exports were pared back to 1.93 million bpd.

An Iraqi oil source close to the matter noted that Iraq tends to allocate more oil for export than the actual available quantity, as it likely has limited storage for any extra crude output.

In May, SOMO told term buyers that 8.7 million barrels of their June Basra Light would be switched to heavy grade crude, traders said.

Those affected had to negotiate with SOMO to try to get their Basra Light supply back as the cargoes had already been sold to third parties, they said.

The Iraqi oil source said there had been some confusion on this issue, but term buyers of Basra Light had the option to buy heavy or light.

Asian refiners are also still evaluating the crude after only receiving the assay containing its technical details a week before it was launched.

Refineries blend oil to ensure the crude meets their plant specifications, and need to know its technical details, including the level of any impurities that could damage their facilities.

With a sulfur content of more than 4 percent, most Asian refiners are also unable to buy an entire shipment of 2 million barrels of Basra Heavy. This means ships may have to call at more than one port or carry out ship-to-ship transfers which will add to the sellers' costs.

Petronas sold 2 million barrels of the crude to Indian refiner Essar Oil at a wide discount of more than $1 a barrel to its official selling price (OSP), set at $6.45 a barrel below the average of Oman/Dubai quotes, trade sources said.

While it's not uncommon for a new grade to sell at a discount as it takes a few months for the oil to be accepted by the market, traders said the launch could have been better planned.

"By alienating the equity holders and the buyers through their actions, they (Iraq) may be hit badly when Iran sanctions are lifted," said a trader who handles Basra crude.

In the longer term, India and China, whose refineries could handle the high sulfur content, were likely to be buyers of Basra Heavy at a suitable price, traders said, while the oil would also head to refineries on the US Gulf Coast.

Source: www.reuters.com

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