Chinese imports of crude oil from Russia have grown rapidly in recent years, almost tripling between 2011 and 2016, compared to growth in total Chinese crude imports of 51% in the same period. In 2016, Russia overtook Saudi Arabia to become China’s largest crude oil supplier, and whilst around 45% of imports from Russia were landborne last year, seaborne trade has driven most of the recent growth.

Feeling Full?

After the first crude oil pipeline between Russia and China opened in early 2011 (the 15mtpa Skovorodino-Daqing section of the Eastern Siberia-Pacific Ocean, or ESPO, pipeline), Russia became China’s largest landborne supplier of crude oil. Based on the initial contract signed by the two countries, Russia now exports c.15mtpa of crude oil through the pipeline, mainly supplying state-owned refineries in north-east China. Following the signing of further contracts in 2014, China’s landborne imports of Russian crude rose to c.23mtpa, and have remained fairly steady since. With the Russia-China oil pipeline operating at full capacity, the additional Russian crude has been imported via the Kazakhstan-China pipeline, after an agreement between Russia and Kazakhstan in 2014.

Piling On The Pounds

Meanwhile, China’s seaborne imports from Russia, mostly ESPO grades shipped from Kozmino, have expanded rapidly in recent years. Between 2014 and 2016, China’s seaborne crude oil imports from Russia increased by 165% to 29mt, accounting for 8% of total Chinese seaborne crude oil imports, leading to Russia becoming China’s sixth largest seaborne crude oil supplier last year.

This rapid growth has largely reflected increasing demand by China’s ‘teapot’ refiners, after the Chinese government allowed independent refiners to process imported crude oil from 2H 2015. Many ‘teapot’ refiners with limited experience in importing cargoes have shown a preference for Russian oil over grades from other suppliers, as a result of the typically smaller cargo sizes and more flexible contracts available, as well as Russia’s geographical proximity. In Shandong Province, where most ‘teapot’ refinery capacity is located, the share of seaborne crude oil imports accounted for by Russia has doubled to 12% in just two years.

A Healthy Appetite

So far in 2017, ‘teapot’ refiners have continued to imports increased volumes of Russian oil, with reports indicating that some refiners have also started to import Urals crude as a result of favourable pricing. In January-July 2017, China’s seaborne crude oil imports from Russia grew 20% y-o-y to 20mt, with 64% of this volume shipped into Shandong Province.

So, Russia-China crude oil trade is growing rapidly. Looking ahead, the expected doubling of capacity of the Russia-China oil pipeline in 2019 is likely to support further growth in landborne trade. However, with quotas for Shandong ‘teapot’ refiners to process another 22mt of imported crude awaiting approval, seaborne imports are also likely to expand further, given Shandong’s reliance on seaborne supplies. Overall, Russia’s importance to China in the crude oil sector seems unlikely to diminish any time soon.
Source: Clarksons