• 9 hours Russia Approves Profit-Based Oil Tax For 2019
  • 13 hours French Strike Disrupts Exxon And Total’s Oil Product Shipments
  • 15 hours Kurdistan’s Oil Exports Still Below Pre-Conflict Levels
  • 17 hours Oil Production Cuts Taking A Toll On Russia’s Economy
  • 19 hours Aramco In Talks With Chinese Petrochemical Producers
  • 20 hours Federal Judge Grants Go-Ahead On Keystone XL Lawsuit
  • 22 hours Maduro Names Chavez’ Cousin As Citgo Boss
  • 1 day Bidding Action Heats Up In UK’s Continental Shelf
  • 1 day Keystone Pipeline Restart Still Unknown
  • 2 days UK Offers North Sea Oil Producers Tax Relief To Boost Investment
  • 2 days Iraq Wants To Build Gas Pipeline To Kuwait In Blow To Shell
  • 2 days Trader Trafigura Raises Share Of Oil Purchases From State Firms
  • 2 days German Energy Group Uniper Rejects $9B Finnish Takeover Bid
  • 2 days Total Could Lose Big If It Pulls Out Of South Pars Deal
  • 2 days Dakota Watchdog Warns It Could Revoke Keystone XL Approval
  • 3 days Oil Prices Rise After API Reports Major Crude Draw
  • 3 days Citgo President And 5 VPs Arrested On Embezzlement Charges
  • 3 days Gazprom Speaks Out Against OPEC Production Cut Extension
  • 3 days Statoil Looks To Lighter Oil To Boost Profitability
  • 3 days Oil Billionaire Becomes Wind Energy’s Top Influencer
  • 3 days Transneft Warns Urals Oil Quality Reaching Critical Levels
  • 3 days Whitefish Energy Suspends Work In Puerto Rico
  • 3 days U.S. Authorities Arrest Two On Major Energy Corruption Scheme
  • 3 days Thanksgiving Gas Prices At 3-Year High
  • 4 days Iraq’s Giant Majnoon Oilfield Attracts Attention Of Supermajors
  • 4 days South Iraq Oil Exports Close To Record High To Offset Kirkuk Drop
  • 4 days Iraqi Forces Find Mass Graves In Oil Wells Near Kirkuk
  • 4 days Chevron Joint Venture Signs $1.7B Oil, Gas Deal In Nigeria
  • 4 days Iraq Steps In To Offset Falling Venezuela Oil Production
  • 4 days ConocoPhillips Sets Price Ceiling For New Projects
  • 6 days Shell Oil Trading Head Steps Down After 29 Years
  • 7 days Higher Oil Prices Reduce North American Oil Bankruptcies
  • 7 days Statoil To Boost Exploration Drilling Offshore Norway In 2018
  • 7 days $1.6 Billion Canadian-US Hydropower Project Approved
  • 7 days Venezuela Officially In Default
  • 7 days Iran Prepares To Export LNG To Boost Trade Relations
  • 7 days Keystone Pipeline Leaks 5,000 Barrels Into Farmland
  • 7 days Saudi Oil Minister: Markets Will Not Rebalance By March
  • 7 days Obscure Dutch Firm Wins Venezuelan Oil Block As Debt Tensions Mount
  • 8 days Rosneft Announces Completion Of World’s Longest Well
Alt Text

Is China Heading Toward An Energy-Debt Crisis?

China’s influence is often overlooked…

Alt Text

The Wireless Power Grid: More Than A 100 Years In The Making

In fulfilling Nikola Tesla’s dreams,…

Alt Text

Don’t Back U.S. Shale To Keep Oil Prices Down

The common assumption that U.S.…

Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

More Info

Russia Reemerges As China’s Top Crude Supplier

Russia - China

Even a layman with no specific interest in international affairs could observe that the Russo-Chinese relationship has reached new heights in the last few years. Cooperation in the energy sphere is of particular importance to both regional powers – and although gas projects are still to come online by the end of this decade, trade and joint projects in oil have broken new ground. Chinese companies now have a minority stake in numerous producing upstream projects, like Verkhnechonskoye and Taas-Yuryakh, as well as in several ambitious up-and-coming endeavors, such as Yamal LNG and Sakhalin-3. Oil exports from Russia to China have experienced a seventeen-fold increase in the last 15 years and now account for almost a quarter of Russia’s exports. Yet, there is still room to expand this strategic link.

Russia is now China’s No.1 crude supplier, a status which it is very likely to retain in the following years, having demonstrated a spectacular 24 percent year-on-year increase in 2016. Almost all supply routes to China experienced growth in 2016, moreover, the ESPO pipeline and Kozmino port (exported 16.5 mtpa and 31.8 mtpa, respectively) were operating slightly above their nominal capacity (15 mtpa and 30 mtpa, respectively). Whilst major state-owned refineries are commonly bound by long-term contracts to Saudi or Angolan suppliers, independent refineries (so-called ‘teapots’) represented one of the leading forces behind this increase. Teapots did not limit themselves to ESPO or other Pacific-bound grades, they also bought Urals, as its economics proved to be more attractive than those of the Oman grade, the characteristics of which are almost identical (31° API vs 30.5° API, 1.5 percent Sulfur Content vs 1.4 percent).

The Eastern Siberia-Pacific Ocean (ESPO) pipeline will remain the main conduct of Russian oil exports to China, with its share slightly increasing from the current 42 percent of the total (22.5 mtpa). Russia’s leading oil company, Rosneft, will also take greater use of a third supply variant – pipeline transportation via the Kazakh Atasu-Alashankou. In keeping with the general spirit of the ‘strategic oil partnership’, Rosneft benefits from lower transportation costs in contrast with ESPO, whilst the Chinese guarantee pipeline-supplied crude to their only refinery in the Sichuan province, located in Pengzhou. In the previous years the Kazakhstani passage amounted to 7 mtpa, however, the two sides agreed on increasing these volumes to 10 mtpa from 2017. Oddly enough, it was not lack of demand that obstructed the ramping up of imports but the insufficiency of pipeline capacity. Related: Oil Prices Set To Rise On Back Of OPEC Deal Extension

A lack of internal interconnectors has hindered the expansion of the ESPO, as only in January 2017 did Transneft, the Russian pipeline transportation monopolist, bring onstream two important pipeline sections, Zapolyarnoye-Purpe and Kuyumba-Taishet. By October 2017, following the completion of the second Mohe-Daqing string, the ESPO pipeline is expected to increase its throughput capacity to 30 million tons per year. The throughput capacity of the other branch laid from the Skovorodino junction point, linking it to the Pacific port of Kozmino, is expected to reach 50 million tons per year by 2020 from the current 30 mtpa. These developments could not only give a fresh impetus to pipeline exports, but also foster the development of new upstream projects in Eastern Siberia that took a palpable blow from the falling oil prices and international sanctions.

Beijing enjoys multiple benefits from such a strategic energy partnership – inter alia, new supply routes have eliminated the risk of the Malacca Strait, through which most of non-Russian imports pass, being shut down in case of a sudden aggravation of matters in the South China Sea. The Russian oil and gas link is considerably safer at virtually no additional cost, moreover, subject to minimal security risk as Russia sees significant value in its partnership with Beijing and is very unlikely to take risky steps to jeopardize it (against the background of real tensions between Moscow and the West). The rapid surge of Russian imports does not counter national policy provisions, as it was the Chinese government that in 2015 lifted a ban for teapot refineries to process imported crude oil. Moreover, the construction of ESPO was greatly facilitated by loans from the Chinese Development Bank, a fully government-owned entity. Related: OPEC’s No.2 and 3 Back Deal Extension

Of course, China is not the only partner with which Russian companies collaborate, and the additional 20 million tons that the Kozmino expansion will bring to Asian markets by 2020 are to be supplied to South Korea, Japan, Malaysia and other nations, too. The competition for Asian market outlets will inevitably intensify the Saudi-Russian rivalry. After Russia unseated Riyadh as the leading oil exporter to China, it has made considerable headway in pressing Saudi oil in Southeast markets, e.g.: in Malaysia. As almost all East Asian countries have a booming automotive market, ESPO is bound to augment its positions, given its good gasoline refining characteristics. Add to this generally more favorable financing terms, a closer distance (thus, lower transportation costs), and you have all the prerequisites of a bitter market share struggle.

Russian companies are sure to try their best in consolidate their hold in new frontiers, as they are attracted by numerous “carrots” – higher premiums than in Europe, more robust demand that is expected to increase with time, as well as appreciable state backing. Rosneft alone, on the back of a 20-year contract with CNPC envisaging the supply of 300 million tons of oil, intends to increase its oil exports to China to 31 mtpa in 2017. Surgutneftegaz, the second-largest ESPO supplier, will try to stay abreast, and so will companies whose footprint so far was relatively modest compared to their capabilities (Gazpromneft, LUKOIL). China will remain the most attractive spot – as the total annual volume of supplies moves from the current 52 mtpa to the 70-80 mtpa interval, China-bound exports will be more or less commensurate with Russia’s aggregate exports from its Baltic ports. There certainly will be setbacks on the way – inter alia, the summer of 2017 is looking to be less hectic than its spring – yet the overarching trend will be really hard to stall.

By Viktor Katona for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • petergrt on May 17 2017 said:
    Is this the same Russia that just announced with Saudis the 9-month extension of the 'production limitation'?

    The Saudis need to keep the oil price from crushing until they complete the IPO of ARAMCO, which is why they are rolling over and do nothing as they are losing gobs market share . . . . . The problem is that they will never get it back - it will be quite the show once they come to that realization . . .

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News