Taiwan's Oil-Where Does it Come From?

At 5 a.m. in the waters off Shalun, Taoyuan, a 300,000-ton "very large crude carrier" (VLCC) slowly maneuvers up close to the unloading buoys the size of small boats. After a short wait while things are arranged and the floating flexible pipe is attached, the crude oil on board is pumped into the oil depot ashore. At this point the mission of the tanker laden with crude oil that left the port of Ras Tanura in Saudi Arabia 17 days earlier has come to an end.

Oil is the lifeblood of modern industry. Without oil the modern economic system would collapse. Taiwan relies on imports for over 90% of its crude oil needs, and this oil is brought to Taiwan across the sea, tanker by tanker.

Oil from afar! The photo shows CPC's own tanker Yu Tsao II (100,000 tons) offloading oil at Talinpu off Kaohsiung harbor. The crude oil is first pumped into offshore floating tanks via a flexible pipeline, then transferred to onshore storage tanks.

Oil-how is it bought?

For the last 50 years Taiwan has always been able to maintain a regular supply of crude oil imports. Even the 1972 and 1978 oil crises, the Persian Gulf War of 1990-91, and the 2003 US attack against Iraq seem not to have had any affect. But what most people don't know is the process of importing crude oil to Taiwan has, in fact, very many variables. The successful and successive purchases and delivery of crude oil have depended entirely on the all-out efforts of staff at Taiwan's main oil refiner, CPC Corporation Taiwan.

In 2007 CPC purchased 190 million barrels of crude, accounting for about half of all domestic imports. Unlike Formosa Plastics Corporation, which makes its profits by major exporting of refined oil-based products, 80% of CPC's oil products go to supply the domestic market. There are two contract models that CPC uses for the purchase of crude oil from overseas. About 60% is done through long-term forward contracts. These are agreements for the continuous purchase of crude over a ten-to-20-year period. In the fourth quarter of each year the amount and price is negotiated for the following year. These contracts are made for the most part with the major oil companies authorized to extract oil (such as BP, Chevron, Exxon Mobil, and Shell) or nationally run oil companies of oil-producing countries.

The remaining 40% is done through the purchase of spot contracts. Each month CPC calculates future refining and sales supply and demand, and then, under the competitive tendering process that is required by law, invites bids from the 47 major oil companies and crude oil dealers worldwide that CPC has approved as eligible suppliers.

CPC's oil purchases and payments are all in line with international trade practices and the company enjoys an outstanding reputation in the market; this is one of the reasons Taiwan has been able to maintain a stable supply of crude. For example, at the start of the Persian Gulf War when Kuwait was invaded and occupied by Iraq, CPC continued to put huge payments into a designated account as required by contract. High-level Kuwaiti officials made a special visit to Taiwan after the war to express their thanks for this action.

Chartering

And one shouldn't think that once CPC has signed an oil purchase contract it can just sit by and wait for the oil to be shipped. A small proportion of CPC's contracts are of the "cost and freight" (CFR) variety where the seller is responsible for shipping the goods to a port designated by the buyer. But most of the contracts are "free on board" (FOB) where the buyer's vessel goes to a port designated by the seller to load the oil. The shipping is the responsibility of the buyer. So, where do you find an oil tanker when you need one?

At 2 a.m. three CPC traders are, as usual, busy at the office. They are in a phone conversation with a London ship chartering company.

Currently CPC has six oil tankers in its fleet dedicated to transporting crude oil but this represents only 25% of their needs. The remaining 75% of transportation capacity must be chartered on the London oil tanker market. For this reason, CPC's ship chartering task force must regularly stay up at night to make overseas telephone calls to hammer out charter deals.

Chartering an oil tanker is not a simple affair. The Forward Freight Agreement (FFA) market that came into being in 1998 at first had no impact on the actual forward freight market itself and was simply a tool that ship owners used to avoid risk. But during the last two years some ship owners and some international "hot money" have made use of this market to hype transport costs and make a profit so that the chartering cost of oil tankers fluctuates several times a day over a broad spectrum. Added to this is the gradual trend toward concentration and monopolization in the global oil tanker market, which strengthens those sellers secure in the ownership of their own ships (specialized shipping companies or major international oil companies) and adds much difficulty to negotiations and agreements.

The head of the CPC chartering team, Stanley Z.C. Shih, points out that the cost of chartering a 300,000-ton oil tanker these last several months has been around US$3 million per voyage but the year before last the price was hyped up to US$11 million-a huge variation.

"Some companies are convinced that the market price will move higher and so are not hiring out their vessels on purpose, driving up the price so negotiations are deadlocked. Sometimes they even take advantage of our working late hours at night in Taiwan and purposely delay things, trying to wear us down both psychologically and physically," says Shih.

At the same time, chartering an oil tanker is not just a matter between CPC and the ship company since the seller of the oil must also confirm the arrangement, as the ship must meet the loading port's requirements for equipment, safety, specifications, commercial records, etc. If a particular ship is rejected, then the ship owners must be asked to make the necessary improvements by a specific deadline, or another ship must be chartered. And in all this back and forth, the oil loading date may be missed.

Origin of Taiwan's crude oil imports

On-time delivery

After going through the great pains of finally chartering a ship there is then another variable-whether the ship can arrive at the loading port on time.

Most of Taiwan's oil comes from the Middle East (about 70%) and West Africa (Angola, Congo-about 15%) as well as South America, Southeast Asia and other places (about 15%). Middle East oil is high in sulfur and this puts high demands on the equipment for refining. Oil from West Africa is low in sulfur and of high quality, and for this reason the proportion of oil bought from West Africa has continued to grow in recent years.

Situated in East Asia, Taiwan is located very far from the Middle East and West Africa. To operate efficiently, a 300,000-ton oil tanker must usually visit two ports to fill up with crude during a single voyage then proceed to Taiwan, which increases the scheduling difficulties for taking on crude. In addition there are uncertain factors of ocean weather like hurricanes that force CPC personnel to continue keeping an eagle eye on the tankers.

West African oilfields are for the most part offshore and the oil storage tanks are set up on top of ocean platforms with very limited capacity. If a tanker should be delayed and not arrive as scheduled, the storage tanks cannot be emptied on time and, with the tanks full, the entire oilfield has to stop production. When this happens not only does the driller suffer disastrous losses, the buyer who has missed the window must pay a huge compensation. Because the allowable window is very short, buying oil from West Africa can be described as "a nerve-wracking fight against time."

"Sometimes we just cannot make it and it is best to quickly do a 'swap' with a tanker from another country that has arrived before ours so they can load up first," says Stanley Shih. His closest call was once when a tanker arrived late in the Congo for an oil purchase. To keep the field pumping, the oil company diverted the oil to a half-empty storage tank holding a different grade of oil and so kept losses to a minimum. Because of CPC's excellent international reputation, the supplier did not make a claim for compensation, which was a stroke of good luck.

International oil price trends

Pirates in the Malacca Strait

After all the difficulties of getting the crude loaded, on the route halfway around the world pirates can suddenly appear.

Along the route to Taiwan from the Middle East and West Africa is East Asia's "energy lifeline"-the Strait of Malacca. Experts estimate that 25% of the world's goods and 50% of the world's energy resources must transit this area. It is one of the world's busiest sea lanes. Nevertheless, it is also the most pirate-infested stretch of ocean in the world. There are constant reports of fishing boats, freighters and oil tankers being robbed or hijacked.

In the 1990s a CPC tanker fell victim to pirates and all the valuables on board were stolen. Luckily, no harm came to the crew, the ship, or the crude oil she was carrying. Because piracy was rampant in the area then, CPC tankers were forced to avoid the Malacca Strait and make a detour around Indonesia and the Philippines.

In recent years the situation around the Malacca Strait has quieted down a bit owing to the strict patrol of US naval forces in the area. But this has sparked a new round in the geopolitical contest between the US, China and Southeast Asian countries and has injected another variable into the region.

From the oil fields of the Middle East and West Africa to the gas stations on the highways and byways of oil-poor Taiwan, each drop of oil is a struggle. Next time you fill up at a gas station, you might give a thought or two to how the gas has gotten here. Perhaps you will gain a deeper understanding of the workings of the modern economy and treasure each drop of oil you have!

International oil price trends

Origin of Taiwan's crude oil imports