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China’s new Russian crude term deal unlikely to dent seaborne inflows

China’s new term crude supply deal from Russia via pipeline is unlikely to make a significant dent on seaborne inflows into Asia’s top oil consumer but will aid in building larger strategic petroleum reserves in the northwest as well as give refiners in the region confidence to boost throughput, analysts said Feb. 8.

The deal, which comes at a time when oil prices are not very far away from $100/b, will give more breathing room for the oil sector in China at a time when global supplies remain relatively tight as OPEC and its allies struggle to increase the output.

State-run oil giant Rosneft signed a 10-year supply deal with China National Petroleum Corp for supplies of 100 million mt, or 200,821 b/d, of crude on the sidelines of a state visit by President Vladimir Putin to China on Feb. 4. The deliveries will be shipped via Kazakhstan for refining at plants in Northwest China, Platts reported citing Rosneft.

CNPC is the parent company of PetroChina.

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

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

Some refiners stand to benefit
The 400,000 b/d Atasu-Alashankou pipeline across the Kazakhstan-China border connects with CNPC’s four land-locked refineries and three SPR sites with domestic pipelines.

Among the four refineries having a combined capacity of 970,000 b/d, the 320,000 b/d Dushanzi Petrochemical and 240,000 b/d Urumqi Petrochemical in Xinjiang are running at around 50% of their capacities, S&P Global Platts’ data showed.

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

Both refineries are configured to crack Russian, Kazakhstan and domestically produced crudes.

Meanwhile, the 200,000 b/d Sichuan Petrochemical in Sichuan province and the 210,000 b/d Lanzhou Petrochemical in Gansu province are running at over 80% of their capacities, according to Platts data.

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

Sichuan Petrochemical plans to lift its throughput to 10 million mt (200,000 b/d) in 2023 to run the facility at 100% of its capacity, the source said. The refinery processed 8.4 million mt of crude in 2021, according the source.

West China is a region with rich oil and gas resources, with the Xinjiang Uygur Autonomous Region, Gansu province and Shaanxi province being key production contributors in the northwest. The Sichuan province in the southwest is one of the country’s demonstration region for unconventional energy production.

Rosneft’s shipments to China include direct supplies via the ESPO pipeline and seaborne exports from the Russian far eastern port of Kozmino. The company said it had exported 442 million mt of crude to China since 2005.

China’s total crude imports in 2021 stood at 10.3 million b/d, data from General Administration of Customs showed. The country’s seaborne imports were 9.4 million b/d in the year, according to data intelligence firm Kpler. S&P Global Analytics estimates China’s crude imports in 2022 to rise 554,000 b/d from last year.

SPR replenishment
Analysts expect some of the additional crude from Russia would likely fill and replace the relatively older barrels stored in China’s SPR sites in Dushanzi, Shanshan and Lanzhou, which are also connected with the Atasu-Alashankou pipeline through domestic pipelines.

Capacities of these sites amount to 16 million cu m, or 103.15 million barrels, of crude.

China held about 346.71 million barrels of SPR in the week starting Jan. 31, falling 7.5% from 374.76 million barrels in the same week of 2021, according to data from intelligence Kpler on Feb. 8.

The top Asian consumer has been building up SPR reserves to secure energy supply. In September 2021, Beijing for the first time released 4.43 million barrels of state crude oil reserves to the domestic market via auctions to ease high feedstock costs faced by the refining industry.
Source: Platts

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