ANALYSIS: Russian oil supplies veer east, western deliveries slide

London (Platts)--28 Jun 2013 759 am EDT/1159 GMT

Russia conceded this week that its planned increased supplies to customers to China will be at the expense of exports to the west in 2013 as the country's crude production fails to rise to match new supply obligations.

On Wednesday, an official at Russia's national pipeline operator Transneft said it would ship 800,000 mt less crude to European destinations this year than previously planned following the recent long-term agreement to increase crude oil supplies to China.

"We supplied those 800,000 mt to the west and now will redirect them to the east. They won't be replaced in the western direction," Igor Katsal, Transneft deputy vice president, told reporters at a Moscow conference.

Only a week ago, Russia's energy minister tried to dispel fears that the balance between east and west export flows might be shifted despite the expected supply deal with China.

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Alexander Novak was quoted by local media as saying that Russia "does not see any significant risk" in shifting the balance between deliveries to Europe and the east.

Traders and analysts alike, however, have been sounding the alarm ever since Russia agreed in March to more than double crude exports to China.

"Russia is choosing to send extra crude to the East, more and more," said one Urals trader. "We will see a shortage on the west side and a bigger stream to the east," the trader added.

The International Energy Agency was also quick to point out as early as April that the agreement may substantially alter the dynamics of Russian crude exports over the medium and long term.

The long-term export agreements between Russia and China, which were finally signed at the end of last week with much fanfare in St. Petersburg, could see this shift in balance take place much more quickly than expected.

Under the deal, Chinese imports will gradually double from 15 million mt/year (300,000 b/d) currently to 30 million mt/year by 2018.

Supplies will be increased gradually, one assumes from now.


The big question though is, where will Russia source the extra crude from?

In April, Russia's deputy energy minister Anatoly Yanovsky said that the ministry, together with Rosneft and Transneft, were working to identify crude sourcing for the additional supplies to China.

"Some kind of plan is being developed to find the most optimal scheme for the deliveries," he said.

Last week, Novak said much will depend upon Rosneft, on whose shoulders the new crude burden lays.

There is an expected medium-term increase from fields in East Siberia, but in the short run the extra oil needs to be redirected from other export routes or the domestic market.

Russia's Urals exports via Novorossiisk and Primorsk have been declining steadily since 2012, with especially sharp drops observed this year.

Initially, the blame was put on the new Baltic port of Ust-Luga, through which some of the previous Primorsk flows were redirected. But even those have not been sufficient to maintain Urals export flows at previous levels.

Urals exports to Europe saw volumes fall both in June and July to the shortest monthly programs in several years, which pushed Urals differentials, especially in Northwest Europe, to a premium over Dated Brent for much of June.

Meanwhile, volumes heading via the East Siberia-Pacific Ocean (ESPO) pipeline to the pacific port of Kozmino are also likely to feel the pressure of the rising supplies to China.

The supply of spot-based ESPO blend exports via Kozmino may rise by just 100,000 b/d to 500,000 b/d by 2020, because of committed sales volumes to China and plans to boost supply to Russian refineries, JBC analyst Arsenije Dusanic told an oil conference in London in May.

"If ESPO is ever to have a chance of becoming a benchmark they definitely need significantly higher volumes than 500,000 b/d coming out of Kozmino," Dusanic said.

Moscow also has a financial incentive in keeping ESPO export supplies constrained, because the contracted deliveries to China are priced off the value of ESPO crude at the port, Arsenije Dusanic said.

The 300,000 b/d of oil Rosneft sends via the ESPO offshoot from Skovorodino to Mohe is price-linked to FOB Kozmino. Price details of the new agreement were not revealed.

Russian crude deliveries to China started in January 2011 under a 20-year contract.

From January 1 next year, an additional 7 million mt/year (140,000 b/d) of Russian crude oil will start flowing via the existing Kazakhstan-China crude pipeline.

In addition, Russia has promised to send another 9.1 million mt/year of crude to China following the completion of a joint venture refinery between CNPC and Rosneft planned for China's eastern port city of Tianjin, CNPC said.

There is also a possibility of sending additional crude by rail via Mongolia as Russia used this route for supplies to western China before the ESPO pipeline was built.

"This is a viable short-term route, but the high cost of rail versus pipeline shipments could prove uneconomic over the long term," the IEA said.

Russia is also experiencing increased demand for oil domestically at a time when more has been allocated for export.

Alliance Oil is in the process of upgrading its Khabarovsk refinery in the country's Far East and expects to start receiving crude via an offshoot of the ESPO pipeline once the upgrade is completed later this year.

Rosneft's Komsomolsk refinery, also in the Far East, is also set to be connected to ESPO crude pipeline system.


One source of new oil for China is seen coming from the former TNK-BP's giant Samotlor field.

TNK-BP's western Siberian output, which used to cover some of the domestic spot demand, gradually disappeared after the company was acquired by Rosneft. Traders said it was most likely heading to China.

"A lot is heading for exports," said a source, adding: "More crude is going to China."

The IEA also said the acquisition would help Rosneft to source crude for additional supplies to China in the short term.

"With Rosneft crude production projected to increase only modestly over the next few years, existing volumes from TNK-BP field's are likely to be used to make up the difference," the IEA said.

Over the short term, Rosneft will likely pull incremental volumes for China from TNK-BP fields in East Siberia or even Samotlor in West Siberia, it said.

This week, Transneft confirmed that at least half of the redirected volumes to China will be produced at Samotlor.


Shortages of crude have been pushing up spot values of crude inside Russia as well, partly on the ever rising processing runs of Russian refineries.

In recent months, Russian domestic crude has been trading consistently at a premium over the export netback, according to Platts data. "Crude is in high demand, but short supply," said one domestic trader.

Many in the market believe that Rosneft is opting for export markets as it needs more money in order to repay the debts after purchasing TNK-BP.

Rosneft's net debt amounted to Rb1.781 trillion ($54 billion), a nearly four-fold increase from Rb458 billion in the same period a year earlier, the company said in its Q1 results at the end of April.

But changing the export routes is not just a matter of meeting Rosneft's financial obligations.

"Russia has developed more export facilities than they have crude for exports," said Andras Pentek from MOL at the Global Refining Summit in Barcelona in May. As a result "they can find alternative routes" for crude exports "even if they can't agree on terms," he said.

--Elza Turner,; Robert Mayer,; Nadia Rodova,
--Edited by Stuart Elliott,

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