By Ron Bousso and Dmitry Zhdannikov
LONDON (Reuters) - Oil major BP (L:BP) expects its trading operations to benefit from growing global crude trade on the back of abundant U.S., Canadian and Brazilian production and rising energy demand in Asia, a top BP executive said.
Tufan Erginbilgic, the head of BP's downstream division that includes one of the world's most powerful trading desks, told Reuters he wanted to expand BP's trading activities using long-term deals on third-party oil and products.
U.S. shale oil production using fracking technology has turned the world's largest oil consumer into an exporter of crude and products, while Canada is developing its vast oil sands deposits and Brazil is developing huge offshore fields.
"There will be more flows in the world because where crude production will increase is the U.S., Canada, Brazil, and refining will increase in Asia and the Middle East," Erginbilgic told Reuters in an interview.
"We are not shy of optimizing the opportunities in any of our businesses," he said when asked if BP planned to expand its trading operations as flows increased.
BP, which employs about 1,800 people in oil trading, trades over 5 million barrels per day (bpd) of oil and refined products, and is only exceeded by rival Royal Dutch/Shell and trading house Vitol.
The trading unit does not normally disclose results separately from the downstream business, which includes refining and petrochemical production. But industry experts estimate trading profits can be more than $1 billion in a good year.
But, in an unusual move, BP said its oil trading had a loss in the fourth quarter of 2016 partly due to a $70 million lawsuit claim related to a cargo for a Moroccan refinery. It coincided with an oil price rally after OPEC announced plans to cut output.
"Our supply and trading is more about physical barrels than people realize," said Erginbilgic, referring to a common market perception that BP trades heavily on paper positions.
He also said BP wanted to expand its long-term deals to trade on crude and products from third-parties. "We like our (BP) flows, but we are not limited by them," he said.
The world is becoming saturated with barrels of light crude from U.S. shale producers, while cuts by the Organization of the Petroleum Exporting Countries are reducing flows of the heavier grades that OPEC states mostly produce.
This benefits Atlantic basin refineries that are less sophisticated than modern Asian and Middle Eastern plants, which can deal with heavy and more complex grades of crude, said Erginbilgic. This should boost prices of heavier fuel oil.
"At some point, fuel oil will have to strengthen in this equation because people will need fuel oil to fill the cokers," he said, referring to units that deal with heavier residual crudes in the refining process.
But he said fuel oil gains were unlikely to hold for long due to new marine fuel regulations requiring the use of fuel with a lower sulfur content than fuel oil and encouraging usage of middle distillates from 2020. Middle distillates are lighter.
"Distillates will strengthen in the process at least early on," said Erginbilgic, adding that new refineries being built in Asia and the Middle East would help meet new marine fuel demand.
He said global demand for distillates was poised to grow faster than gasoline.
"Given the complexity of our refineries we are well positioned," said Erginbilgic, adding that 47 percent of output from BP's plants was distillates while less than 3 percent was high sulfur fuel oil.
BP has said it does not plan to build new refineries but will modernize existing ones.
Erginbilgic, who has run BP's downstream division since 2014, said he was ensuring that the trading business worked more closely with refining to generate profits.
"We brought together supply and trading and refining, they make decisions in the regions together. That allows you to optimize the pie," he said.