Russia-Ukraine conflict puts China's incremental crude appetite in spotlight

Chinese buyers of spot Russian crude are temporarily refraining from closing deals following uncertainty around shipping, but Asia's biggest oil consumer has the appetite to absorb incremental cargoes if other buyers decide to cut purchases from the leading European supplier, according to analysts, traders and refiners who spoke to S&P Global Platts.

While US President Joe Biden has stopped short of targeting the energy sector in the latest sanctions against Russia amid efforts to avoid disruptions to energy supplies, sources said Chinese buyers will be watching the situation for a little longer before jumping to conclusions.

"The impact on crude flows is limited at this point. But there is little reason for China not to continue buying Russian crude, particularly as the two countries continue to increase collaboration in the energy space," said Grace Lee, senior China oil analyst at S&P Global Platts Analytics.

But what Chinese buyers are hopeful for is attractive pricing of Russian crudes, just in case other buyers decide to maintain a distance with Russia.

"The current tension has pushed up oil prices. Chinese buyers will take more Russian barrels if the producer offers good discounts," said a trader with a Chinese state-owned oil giant who sell crudes to independent refineries.

A Beijing-based analyst with an international consultancy said: "China will be able to take more Russian crude as most refineries in China can crack Russian crudes -- ESPO, Urals, Sokol, which can be the alternatives of medium sour crudes including those ones from the Middle East and US."

Russian ESPO crude, which flows to China via pipelines, is not only a hot favorite among China's Shandong-based independent refineries, it is also the solo feedstock for one or two refineries of state-run PetroChina in the northeastern region.

No immediate threat to flows

Russia is the second-largest crude supplier to China, delivering 1.6 million b/d of crude in 2021, data from China's General Administration of Customs showed. Although the volume of crude that flowed from Russia fell 4.6% on the year in 2021, its market share edged up to 15.5% from 15.4% in 2020.

China's overall crude oil imports in 2021 fell 5.1% on the year to 10.3 million b/d.

Platts Analytics expects China's crude import growth to be 536,000 b/d on the year in 2022, according to a monthly report on Feb. 11.

Chinese analysts, traders and refiners said although there is no immediate threat to trade flows, Chinese buyers of Russian crudes will be wondering if any potential financial sanctions could make trade dealings difficult.

"Independent refineries have almost finished ESPO procurement for April cargoes. They will need to wait and see if loading and payment operations are smooth," a Qingdao-based trader said, adding that refineries pay with US dollars currently.

Pipeline constraints

"Infrastructure is another issue to consider while estimating any increase in China's crude imports from Russia," the Beijing-based analyst said.

Some analysts said that imports via pipeline under term contracts between CNPC, PetroChina's parent company, and Rosneft leave limited room to increase pipeline-based shipment.

The state-owned oil giant has a deal to import 40 million mt of pipeline crude from Russia, comprising 10 million mt/year via Kazakhstan through the Atasu-Alashankou pipeline under a bilateral state agreement, and 30 million mt/year of ESPO Blend from Rosneft via the Skovorodino-Mohe pipelines to PetroChina. Both are near full capacity, according to refinery sources.

The China-Russia pipelines -- which connects with Skovorodino-Mohe pipeline to carry ESPO Blend crude from the Mohe border station in China to Daqing in the northeastern Heilongjiang province -- have meet their full capacity of 30 million mt/year, or 600,000 b/d, to fulfil the contract between CNPC and Rosneft.

On Feb. 4, CNPC and Rosneft signed an agreement for supplying 100 million mt, or around 200,000 b/d, of crude oil to the northwestern China through Kazakhstan for 10 years. This agreement is more likely to be an extension of the current contract via the same pipeline which will expire next year.

The room to increase imports via Atasu-Alashankou pipeline is limited at around 100,000 b/d, given the pipeline capacity at 400,000 b/d while China's crude imports from Kazakhstan was at 90,200 b/d in 2021.

Opportunities in seaborne market

"Supplies from the seaborne market is more likely to increase if South Korea and Japan are not willing to compete," the Beijing-based analyst said.

Although the US has not imposed direct sanctions on Russian energy exports, feedstock managers at major South Korean, Japanese and Indian refiners told Platts they could find purchasing Far East Russian crude rather troublesome due to the increase in legal, financial and administrative hurdles doing businesses with Russian oil entities.

Russia's seaborne spot crude exports to China include ESPO Blend loaded from Kozmino, Sokol from De-Kastri and Sakhalin Blend from Prigorodnoye, as well as Urals loaded from the Russian Black Sea port of Novorossiisk.

Urals is priced against Platts' Dated Brent, but supplies from the Far East are priced against Platts' Dubai crude assessments, allowing Russia to sell ESPO and Sokol cargoes competitively given the Middle Eastern benchmark's more than $8/b discount against Brent.

In the Far Eastern port Kozmino, full transportation capacity for ESPO has been increased to 80 million mt/year, with shipments of 40 million mt reported in 2021. ESPO is the most-popular Russian grade in China due to its specifications and geographical proximity -- 100,000 mt cargo size, five-day voyage and good gasoil yield.