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Russia Squeezes Out Saudis In Asia Market Share Race

Saudi Arabia is struggling in its key economic and geopolitical ambition to position itself as the key substitute in Asia in general and China in particular for lost Iranian barrels due to re-imposed sanctions by the U.S. The opportunity is huge as, a senior source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com last week, Iran as of last week was exporting just 266,000 barrels per day (bpd) of crude oil compared to the 2.5 million bpd exported just before the U.S. withdrew from the nuclear deal last May. Although some of the headline figures appear to offer some scope for Saudi optimism, a look beneath the surface shows the situation is far from rosy, with threats from both U.S. and Russian supplies. Indeed, with the recent scare over contaminated barrels now apparently behind it, Russia is also ramping up its threat against increased U.S. supplies as well, signalling a broader burgeoning relationship with the Asian powerhouse of China.

Specifically, over the January to May period, Saudi state-owned behemoth, Aramco, seemed to hold its own in China, Asia’s biggest oil consumer. According to the latest figures from China’s General Administration of Customs, the country imported 223.858 million barrels of crude oil from Saudi Arabia, up 9.8% from the 203.811 million barrels of a year earlier. It is crucial to note, however, that this positive position was due to the addition of two new independent refinery customers – Zhejiang Petrochemical Co., and Hengli Petrochemical (Dalian). Hengli, with a total capacity of 400,000 barrels per day (bpd), signed a term contract with Aramco in late 2018 to buy 130,000 bpd from it, whilst Zhejiang Petrochemical, also with a 400,000 bpd total capacity, agreed to take 116,000 bpd from Aramco on a term basis. This latter deal coincided with Aramco offering to take a 9% stake in Zhejiang Petrochemical.

Without these two deals, Saudi would again have lost its top crude supplier position for China to Russia, which supplied 220.201 million barrels and held a 14.6% market share in China for the January to May period. A similar – but worse – theme was evident with the other big Asian customers of South Korea and Japan. South Korea bought in 126.648 million barrels of crude oil from Saudi Arabia over the January to May period, a 1.2% drop compared to 128.229 million barrels received in the same period a year ago. Japan, meanwhile, imported around 5.5% less crude from Saudi over the period, a total of 1.169 million bpd. Related: A Serious Contender To Lithium-Ion Batteries

For Russia, the ongoing OPEC+ production cap deal allows it a lot more flexibility that it allows Saudi Arabia. “Russia sort of produces whatever it wants whenever it wants, according to the dynamics of the oil price not the dynamics of the OPEC+ deal, as it knows that Saudi has to toe the production cap line as an example to the rest of the OPEC producers but Russia merely has to lend its vocal support to the deal to keep Saudis happy, and it [Russia] will effect real cuts if and when the oil price action requires it,” Sam Barden, chief executive officer of global energy trading firm, SBI Markets, in Melbourne told OilPrice.com. “The Kremlin was also the earliest of all the major oil producers – with the exception of the U.S. itself perhaps – to position itself to make up the supply shortfall that was going to be caused by the new U.S. sanctions on Iran, as its ESPO [East Siberia-Pacific Ocean] blend was a very good substitute for the Iran blends in high demand in Asia,” he said. 

The strategy to target Asia in general and China in particular was properly put into action after the launch of the East Siberia-Pacific Ocean pipeline in 2010, which allowed much more oil to go directly to Asia, and was given a further boost in January last year with the launch of a second parallel pipeline, which means that China itself can import around 30 million tons of oil (around 600,000 bpd) every year from Russia, Mehrdad Emadi, head of global risk analysis and energy derivatives markets consultancy, Betamatrix, in London, told OilPrice.com. The original idea was that this increase to Asia could be achieved simply by boosting crude oil output in East Siberia but this did not occur as early as was needed, so it was necessary to make some adjustments to crude oil intended for Europe, both in terms of quality and quantity. By the end of 2017, ESPO crude export levels had quadrupled since 2010, to nearly 1.2 million bpd, and are set to increase to around 1.6 million bpd in 2020, according to Russia’s energy ministry. These numbers include long-term deliveries to China via the Skovorodino-Mohe pipeline offshoot from the ESPO trunk network as well as spot cargoes via the port of Kozmino on the Pacific Ocean.

This drive to capture as much of the Asia market – especially that of China – as soon as possible was a key reason for the drop in quality seen in ESPO flows to Europe, even before the recent contamination with Russian crude manifested itself. As early as November 2017, Russian national pipeline monopoly Transneft stated that the sulphur content of Urals oil exports from the Baltic port of Ust-Luga and the Druzhba pipeline running to Europe would increase to a critical level of 1.8% in 2017 – the very edge of the level considered allowable for Urals crude, according to the quality range set by the Russian standards agency Rosstandart – and then would continue to rise, as more low-sulphur crude oil is shipped to China. According to an-end December press release on Transneft’s own website, the sulphur content in Urals produced by Tatneft and Bashneft was more than 2.0-2.3%. Related: Will We Really See An Oil Glut In 2020?

Given these logistical developments and the ever-closer relationship between Russia and China in other energy projects (the mammoth ‘Power of Siberia’ gas pipeline running from Russia into China is 99% complete) and security (Russia was an original founder alongside China of the political, economic, and security alliance, the ‘Shanghai Cooperation Organisation’), it is entirely unsurprising that the vast majority of China’s state-run and independent sectors continue to favour Russia’s ESPO blend. In June, the ESPO blend was the top feedstock crude for China’s independent refineries, with 16.273 million barrels imported, up 33.3% from May’s 12.168 million barrels, according to various independent industry data. This shift back to Russian supplies has also been exacerbated by the worsening security fears attached to doing business with Saudi Arabia in the current geopolitical environment. “Potential buyers are looking at threats from Iran, threats from the Yemeni Houthis launching strikes into Saudi, and attacks in southern Iraq, which is deterring buyers form dealing with Saudi,” the Iran source told OilPrice.com. “China National Petroleum Corporation very recently refused to go ahead with a major term contract with Saudi for this very reason,” he added.

“In addition to the better security profile, the easier general logistics, the voyage times for Russia ESPO are shorter than those for Saudi grades, the lot sizes are more flexible, and it yields more gasoil as well, which is very useful for a lot of these Chinese refiners,” said Betamatrix’s Emadi. “Moreover, Russia is offering term contract deals that are framed in such a way that for a certain amount of crude oil bought by key Asian customers every month for whatever number of years, these customers will also be given the right to buy oil derivatives, including various petrochemical products, at deeply discounted prices,” he concluded.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on July 30 2019 said:
    China is the world’s largest importer of crude oil and natural gas and also the world’s second largest importer of LNG. Furthermore, it is the world’s largest energy market. In addition to this, the Asia-Pacific region is the world’s largest market for oil where demand is highest and where more than 75% of Saudi and Gulf crude oil go goes.

    Russia is the world’s largest producer of crude oil and Saudi Arabia is the world’s largest oil exporter. It is no wonder then that both giant oil producers would compete for a bigger share of the Chinese and Asia-Pacific oil markets.

    So far Russia has had a bigger share in China’s oil market supplying some 1.55 million barrels a day (mbd) compared with under 1 mbd by Saudi Arabia. Russia’s upper hand in the Chinese market is not going to change well into the future because of proximity, common borders and oil pipelines. The United States is not a contender since its total oil exports worldwide only amounted to 2 mbd in 2018 of which less than 300,000 barrels a day (b/d) went to China before the trade war.

    China is continuing to buy Iranian crude in increasing volumes accounting for 31% of all Iranian exports or 659,000 b/d. And contrary to the author’s claim, Iran exports never exceeded 2.125 mbd even before the introduction of US sanctions. In 2017, Iran’s crude oil exports averaged 2.125 mbd according to the authoritative 2019 OPEC Annual Statistical Bulletin. Iran’s exports in 2018 averaged 1.85 mbd 86% of which went to China, India, the EU and Turkey.

    One major difference between Saudi Arabia and Russia is that Russia can live with an oil price of $40 a barrel or less compared with a price far higher above $80 which Saudi Arabia needs to balance its budget. This means that Saudi Arabia is far more shackled with OPEC+ production cut agreements than Russia.

    Another factor is the strategic alliance between Russia and China bonding the world’s largest economy based on purchasing power parity (PPP) with the world’s superpower of energy.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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