Skovorodino-Mohe pipeline may supply 30 million tons of oil annually starting from 2019. Russia's Deputy Prime Minister Arkady Dvorkovich said after the meeting of Russian-Chinese intergovernmental commission for fuel and energy cooperation that the parties have already agreed on all details of future supplies. Chinese oil refineries are gearing up to receive more Russian oil transported through an expanded Siberian pipeline network from January, likely cementing Russia’s position as China’s largest oil supplier in a close race with Saudi Arabia.
As Reuters writes in an article "Russia set to pipe more oil to China, stepping up race with Saudis", the planned ramp-up in pipeline supplies agreed in contracts signed in 2013 comes amid a pledge by producers to cut output to tighten global markets and illustrates the nip-and-tuck contest between the world’s top oil exporters, Russia and Saudi Arabia, for dominance in the biggest crude importer, China. Russia’s top oil producer Rosneft said it is set to supply under government agreement 30 million tonnes of ESPO Blend crude to PetroChina in 2018, or 600,000 barrels per day (bpd), an increase of 50 percent from this year, after completion of the second East Siberia Pacific Ocean (ESPO) pipeline, which has a main spur to Chinese border town Mohe.
“Rosneft has enough resources to supply under all its existing contracts, including the planned increase of supplies to China by 10 million tones next year,” Rosneft said in a statement emailed to Reuters on Thursday.
Top state oil firm PetroChina has designated three refineries in northeast China as the main receivers of Russian oil, with one of them undergoing an $880 million upgrade. Liaoyang Petrochemical Corp, in Liaoning province, already a regular processor of Russian oil, is expected to double its refining capacity with the upgrade to 400,000 bpd by the end of 2018, said two refinery sources. “Plants were told to be prepared for more Russian oil next year ... Liaoyang will be the main participant as it’s poorly located for seaborne shipments,” said one of the refinery sources. A PetroChina trading executive said seven plants in northeast China are already taking Russian oil, but once upgrade works complete, plants in Liaoyang, Dalian and Jilin will be the main processors.
“It’s about boosting efficiency by dedicating these three plants to Russian oil,” said the executive. A PetroChina spokesman said he did not have information on the matter. Rosneft’s plan to proceed with the contracted supplies comes despite a pledge by producer club the Organization of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is the de-facto leader, and other suppliers including Russia to cut oil output by around 1.8 million bpd between January this year and March 2018.
Race between Russia and Saudi
Rosneft’s new flows of piped oil will come as Saudi Arabia aims to secure a stake early next year in a Chinese refinery after years of negotiations and as Saudi Aramco prepares for its global IPO. Financed by Beijing’s estimated $50 billion in loans to Moscow started last decade, Russia’s higher pipeline sales will lift its total crude sales to China to new highs after the country overtook the Saudis for five months so far in 2017 as China’s top supplier. Chinese customs data showed Russia supplied an average of 1.18 million bpd in the first seven months of 2017, versus Saudi Arabia’s 1.05 million bpd.
Suresh Sivanandam, of consultancy Wood Mackenzie, said the fresh pipeline supplies would offset part of China’s domestic production declines from aging oilfields in its northeast, and allow Russia to expand its market share in the world’s largest oil importer at the expense of OPEC.
But Riyadh is not giving in easily, with the Saudi energy minister vowing last month to finalize a deal with PetroChina early next year to invest in the Yunnan refinery in China’s southwest that started operations this past July.
That would help secure Aramco a share in crude supply starting in 2018 to the 260,000-bpd plant that receives oil from a Myanmar port linked to Yunnan via a pipeline, said the PetroChina trading executive.
“The Saudis have been promoting hard to sell more oil, by tying up supply deals with refinery stakes,” said the executive, who declined to be named as he was not authorized to speak to media. Saudi volumes will also receive a boost through a separate supply pact with state-run China National Offshore Oil Corp that is starting up a new 200,000 bpd plant in south China.
Russia will secure the additional barrels for ESPO deliveries mostly by raising production at two new East Siberian oilfields that Rosneft launched last year – Kuyumba and Messoyakha - while it may also divert volumes from export routes to the west.
Russia and China agreed on Wednesday that Rosneft will supply China National Petroleum Corp (CNPC) [CNPET.UL], parent of PetroChina, with 28.3 million tonnes of oil via the Skovorodino-Mohe pipeline in 2018, while the remaining 1.7 million tones of ESPO Blend will be loaded via Kozmino port.
