China’s new Russian crude futures deal unlikely to hurt maritime flows

Russia’s new crude oil pipeline deal is unlikely to significantly dent seaborne flows to Asia’s top oil consumer, but it will help build larger strategic oil reserves in the northwest and will give refiners in the region the confidence to increase throughput, analysts said Feb. 8.

The deal, which comes at a time when oil prices are not far off $100/b, will give China’s oil sector more breathing space at a time when global supply remains relatively tight as OPEC and his allies are struggling to increase the output.

State-owned oil giant Rosneft has signed a 10-year supply agreement with China National Petroleum Corp to supply 100 million tonnes, or 200,821 bpd, of crude on the sidelines of a state visit by President Vladimir Putin in China on February 4. Deliveries will be shipped via Kazakhstan to be refined at factories in northwest China, Platts said citing Rosneft.

CNPC is the parent company of PetroChina.

The new deal is expected to boost China’s crude imports from Russia, which reached 1.6 million bpd in 2021 and accounted for a 15.5% market share, according to official Chinese data.

“But it’s not a threat to China’s maritime crude suppliers,” said a Singapore-based analyst, adding that PetroChina’s refineries in northwest China depend on locally produced crude as well as barrels from Russia and Kazakhstan through a pipeline.

Some refiners should benefit
The 400,000 bpd Atasu-Alashankou pipeline across the Kazakhstan-China border connects CNPC’s four landlocked refineries and three SPR sites with domestic pipelines.

Of the four refineries with a combined capacity of 970,000 bpd, the 320,000 bpd Dushanzi Petrochemical and 240,000 bpd Urumqi Petrochemical in Xinjiang are operating at around 50% capacity, according to data from S&P Global Platts.

“These two refineries are the main outlets for additional barrels of Russian crude. Dushanzi Petrochemical has more room to absorb barrels as it has a 1.4 million tonnes/yr ethylene project,” a Beijing-based analyst said.

Both refineries are set up to crack Russian, Kazakh and domestic crudes.

Meanwhile, the 200,000 bpd Sichuan Petrochemical in Sichuan Province and the 210,000 bpd Lanzhou Petrochemical in Gansu Province are operating at more than 80% capacity, according to data from Platts.

A source close to Sichuan Petrochemical said the refinery would likely take more domestic crude produced from Xinjiang as well as barrels from Kazakhstan, instead of relying on Russian crude through a pipeline.

Sichuan Petrochemical plans to increase its throughput to 10 million tonnes (200,000 bpd) in 2023 to operate the facility at 100% capacity, the source said. The refinery processed 8.4 million tonnes of crude in 2021, the source said.

Western China is a region rich in oil and gas resources, with the Xinjiang Uyghur Autonomous Region, Gansu Province and Shaanxi Province being the main contributors to production in the northwest. Sichuan Province in the southwest is one of the country’s demonstration regions for unconventional power generation.

Rosneft’s shipments to China include direct supplies via the ESPO pipeline and maritime exports from Russia’s Far Eastern port of Kozmino. The company said it exported 442 million tonnes of crude to China since 2005.

China’s total crude imports in 2021 amounted to 10.3 million barrels per day, according to data from the General Administration of Customs. The country’s maritime imports amounted to 9.4 million barrels a day during the year, according to data intelligence firm Kpler. S&P Global Analytics estimates that China’s crude imports in 2022 will increase by 554,000 bpd from last year.

SPR replenishment
Analysts expect some of the additional crude from Russia to fill and replace relatively older barrels stored at China’s Dushanzi, Shanshan and Lanzhou SPR sites, which are also connected to the Atasu-Alashankou pipeline via national pipelines.

The capacities of these sites amount to 16 million m3, or 103.15 million barrels of crude.

China held about 346.71 million barrels of SPR in the week starting Jan. 31, down 7.5% from 374.76 million barrels in the same week of 2021, intelligence data shows. Kpler of February 8.

The leading Asian consumer has built up SPR reserves to secure its energy supply. In September 2021, Beijing for the first time released 4.43 million barrels of public crude oil reserves to the domestic market through auctions to mitigate the high raw material costs facing the refining industry.
Source: Platts