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Russia, China Start Tough Crude Supply Talks

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AP_85597770448-Russian President Vladimir Putin-Chinese President Xi Jinping

Well-established supply patterns for Russian crude oil, both internally and for export, could be in for a massive shake-up after 2024 because China, one of the largest customers, is thinking of cutting imports from Russia.

Sources tell Energy Intelligence that Russia and China have started potentially difficult negotiations over the future of a 10-year, 200,000 barrel per day supply deal, due to expire in 2024, that sends crude from Russia to China via Kazakhstan.

A source at China National Petroleum Corp. (CNPC) stressed that China still needs Russian oil, both as a source of supply and as a crucial piece of the strategic partnership between the countries. But the volumes coming via Kazakhstan to western China are no longer required, the source said.

In a further blow to supply patterns, Russia's largest producer Rosneft has informed pipeline operator Transneft that also starting from 2024 it plans to reroute 300,000 b/d of Vankor crude away from the national network. Instead, the crude will go to a separate pipeline running to Sever port for further shipment via the Northern Sea Route.

The move will give Transneft a headache over the overall quality of crude in its system. But at the same time, that loss to the Transneft system might be compensated for by the Rosneft crude that currently flows to China via Kazakhstan, if it is no longer wanted by Beijing. That adjustment, however, would require thorough calculations both in terms of volume and quality.

China Syndrome

China currently receives roughly 600,000 b/d of Russian crude via the Skovorodino-Mohe-Daqing line, a spur from the East Siberia-Pacific Ocean (Espo) pipeline. Supplies via the line started in 2011 under an agreement between Rosneft, Transneft and CNPC. That deal included shipments of 15 million metric tons per year (300,000 b/d) over 20 years in return for a loan of $25 billion. In 2013, Rosneft and CNPC agreed on extra shipments from the line of 2.64 billion barrels over 25 years.

In 2014, the sides reached a separate deal — now back in negotiation — that would send 7 million tons/yr (140,000 b/d) to western China via Kazakhstan, with Rosneft's barrels flowing to Kazakh refineries and Kazakh crude going to China. Agreed shipments under that deal later increased to 200,000 b/d.

But now, sources say, since the bulk of Chinese consumption is in the east, Beijing believes it no longer needs additional volumes flowing to western China where demand is lower. Another reason for the lower appetite for Russian crude in China is the growing green agenda and Beijing's own pledge to reach carbon neutrality by 2060.

Negotiations are going to be tough with lots of factors to be taken into account. First, Russian flows to China have always been part of strategic relations between the two countries and those are still crucial.

Second, China is a crucial market for Russia's hydrocarbons since it helps Moscow diversify its exports away from Europe, which is more likely to cut fossil fuel supplies as the energy transition gathers pace. If China's reliability as a customer is called into question, the implications for Russia's market access could be substantial. Russia ships about 1.6 million b/d of Espo crude to Asian markets, of which 600,000 b/d goes directly to China via the Skovorodino-Mohe-Daqing spur, with the rest being exported to other markets from Kozmino on Russia's Pacific Coast.

Third, the current deal also involves Kazakhstan. Russia sends crude to Kazakh refineries, while Kazakh crude flows to China. Because of some quality issues, Russia also sends compensatory barrels to Kazakhstan. Any new agreement, or the lack of it, would impact Kazakhstan as well.

November Exports

Russia sent 202,760 b/d of crude oil to China via Kazakhstan in November, while another 612,700 b/d was sent via the Skovorodino-Mohe-Daqing line, both slightly down from October exports.

Russian oil exports to non-former Soviet Union states totaled 4.467 million b/d in November, which is down by 111,000 b/d from October. The decline in November exports was highly expected after the completion of a heavy round of maintenance work at Russian refineries in October.

Year on year, Russia's November exports to non-former Soviet Union states rose by almost 400,000 b/d, which reflects the country's growing production under the Opec-plus deal.

According to Transneft data, Russian producers are poised to increase crude oil shipments to Europe via the Druzhba pipeline in December, while seaborne exports will also rise.

Russian, Kazakh Oil Pipelines to China

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Topics:
Oil Pipelines, Crude Oil
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