The SK Corp. deal may depress distillate markets as it means Vietnam's top fuel importer will not need to complete an earlier tender, a company source said, although most traders had expected Asia's biggest refiner to be a key supplier to Vietnam this year.

Under the deal, the first between the two firms, SK Corp. will export two 80,000-ton cargoes every quarter, starting from February and ending in December. Petrolimex will pay a premium of $1.30 a barrel to Singapore benchmark 0.5 percent prices on a delivered basis, industry sources said.

The shipments will be ferried to shore on a ship-to-ship basis in the deep sea off Van Phong Bay, the sources added.

"This term contract replaces the old one we had with KPC," said a source from Hanoi.

The deal with Kuwait Petroleum Corp. (KPC), which lasted 13 years, ended prematurely late last year amid a dispute over pricing, although dealers had expected Petrolimex to seek new suppliers as Vietnam moved to use exclusively 0.25 percent sulfur diesel nationwide from Jan. 1.

Previously it had used primarily 0.5 percent sulfur fuel.

SK Corp. and Taiwan's Formosa Petrochemical Corp. were tipped as likely sellers, as the two refiners were large enough and has sufficient blending capabilities to supply the grade. Most countries in Asia use either 0.5 percent sulfur or the much cleaner 0.005 percent.

The SK Corp. deal is smaller than KPC's usual 720,000 tons of supplies, although the new contract excludes January barrels.

The final deal means Petrolimex will not need to buy some 158,000 tons of diesel that remained outstanding from a partly awarded tender for the first quarter.

"With the new batch of term supplies, Petrolimex will not award the balance of the quarterly spot tender," a second source said.

Vietnam's biggest oil marketer had bought 370,000 tons of medium-sulfur diesel in the tender.

Supply in balance

Petrolimex's first-quarter diesel purchases via spot and short term deals totaling 508,000 tons – higher than the fourth-quarter intake of 370,000 tons – have compensated for the late start to the annual term contract.

"We bought a lot more in the first quarter to make up for supplies that would have come from the term contract. Essentially, the new term volumes are the same as before," said the Petrolimex source.

But regional demand sentiment continued to be buoyed by Vietnam's growing thirst for diesel, used to fire power generators, and for road transportation and agriculture.

"This is good news for the high-sulfur grade, which is used as a feedstock for linear blending with low-sulfur diesel to make the Vietnamese specifications," a Western trader said.

A fast-growing economy, projected to grow more than 8 percent this year, will boost imports in a country that lacks a major refinery despite being third-largest crude oil producer in Southeast Asia.

Vietnam expects a 20 percent jump in fuel imports thus year, including at least 6.9 million tons of diesel.

The country, Asia's second-largest diesel and gasoline buyer after Indonesia, spends around $3 billion a year on fuel imports.

Besides Petrolimex, a smaller host of importers include Petechim, Petec, Saigon Petroleum, PDC, Military Petrol and Oil Co., Vinapco, and Dong Thap Oil.

Source: Reuters