US refiners scrambling after Nigeria oil shut-ins

Reuters, 03.24.03, 4:12 PM ET By Manuela Badawy and Barbara Lewis NEW YORK/LONDON, March 24 (Reuters) - U.S. oil refiners are scrambling for alternatives to crude supplies lost from strife-torn Nigeria, eager to avoid being caught short as gasoline demand rises for summer, traders said on Monday. While there is plenty of lower-quality crude available on international markets, it is Nigerian crude's high gasoline yield that refiners will miss as the oil industry seeks to step up gasoline production for the vacation driving season. Energy multinationals ChevronTexaco (nyse: CVX - news - people), Royal Dutch/Shell <RD.AS> <SHEL.L> and France's TotalFinaElf <TOTF.PA> have shut most of their operations in the country's oil-rich Niger Delta with total losses of 817,000 barrels per day (bpd), or 37 percent of the West African country's 2.2 million bpd production. "The enhanced instability may continue for a considerable period, and we would not count Nigerian production as being a secure supply source for a while to come," said Paul Horsnell, oil analyst at J.P. Morgan in a research note. Refiners' options have already been restricted by supply disruptions in Venezuela since December and the loss of Iraq's crude exports last week as the U.S.-led forces launched a military offensive against Baghdad. Heavy shipments expected from Saudi Arabia in the coming weeks have yet to roll into U.S. storage tanks as U.S. crude inventories wallow near 25-year lows. Saudi supplies will in any case be heavier and higher in sulphur, or more sour, than the Nigerian light, sweet crudes which are good for making gasoline. As a result, prices are rising sharply for the U.S., Latin American and North Sea crudes that refiners can use as alternatives. Nigeria is one of the top six oil exporters to the United States, sending more than 560,000 bpd last year. "We are getting a knock-on effect on the domestic grades. Light Louisiana Sweet differentials for both April and May have strengthened, the (Colombian) Cusiana market will firm and (the disruptions) will support North Sea differentials," a U.S. crude trader said. FORCE MAJEURE The Ijaw ethnic group at the center of Nigeria's tribal violence and an army crackdown that led to the shutdowns vowed to strike in the eastern half of the delta if soldiers attacked them. Oil industry officials said they feared the a growing military campaign could further inflame the situation if the army launched reprisal attacks over the killing of a dozen soldiers by militants in recent weeks. Shell and ChevronTexaco have declared force majeure on Bonny Light , Forcados and Escravos oil exports from March 22, with expected delays on Bonny Light of up to five days and Forcados loadings by three to 14 days, depending on the cargo. U.S. refiner Sunoco (nyse: SUN - news - people), a steady buyer of Nigerian crude, has already turned to the depressed North Sea market to replace the lost barrels with Norwegian Ekofisk , a sweet crude, traders said. The heavy volumes expected from Saudi Arabia, which already stepped up production sharply this year to make up for the shortfall from Venezuela, make the loss of Nigeria's supply manageable as long as it does not drag on. "The market was so bearish, it needed something like this," a crude trader said. "Now sellers are going to be a bit more proud of their cargoes and push up differentials." But with U.S. refiners looking to ramp up gasoline production in coming weeks ahead of summer, they will be anxious to replace any lost Nigerian cargoes quickly. "Anybody who had something loading this week is going to be looking for some substitute. They could look to the North Sea where there is plenty of April-loading crude available," a North Sea trader said. Substitute cargoes from the North Sea take 12 to 13 days to reach U.S. shores compared to the 15-day voyage from Nigeria. Refiners have the advantage that Latin American and North Sea grades have both been weakening before news of the Nigerian problems. Prices for Colombia's sweet Cusiana dropped about 30 cents from the previous month, while UK and Norwegian crude differentials having fallen by as much as 60 cents in the past week. The spread between U.S. benchmark West Texas Intermediate crude and North Sea Brent has been around $2.50 in recent days, wide enough to make the shipment across the Atlantic economic for some grades, dealers say. Cheaper shipping rates have also encouraged transatlantic shipments.