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Global shift sees crude flows reverse

By Elzbieta Rabalska

March 16, 2010 - In recent years Asia has risen as an enormous growth centre of oil demand, with China and to a lesser extent India leading the way.

In response to these changes, exporters of crude oil have switched focus east, as can be seen in the way they have tailored their export strategies.

According to the International Energy Agency, Chinese oil demand rose from 6.69 million b/d in 2005 to 8.51 million b/d in 2009, which equates to annual growth of over 6%.

Indian oil demand has grown from 2.57 million b/d to 3.31 million b/d over the same period, which equates to annual growth of over 7%.

Meanwhile, in the main global oil demand centres of Europe and the US, growth is floundering. Demand in North America fell from 25.52 million b/d to 23.31 million b/d over the same period and from 15.52 million b/d to 14.50 million b/d in Europe.

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Chinese refining capacity has risen from 4.649 million b/d to 6.806 million b/d over this period. Indian refining capacity has increased from 2.25 million b/d to 2.84 million b/d. (Listen to related podcast: China, India up the ante against Asia oil mandarins).

These expansions have helped to trim both countries’ dependency on oil product imports, but leave them needing more crude than ever.

In the West, refining capacity is also up, although by a much smaller degree than in Asia. Analysts however agree that there is a view to reduce capacity, which is considered to be surplus to requirements as demand falls in the rich countries of the OECD.

European and US refineries are struggling economically and several major oil producers are looking to sell or close refining capacity.

Old and expensive refining capacity in the West is expected to give way to newer and more efficient capacity in Asia and the Middle East.

The most recent refinery casualty in the European market was Total’s 140,000 b/d Dunkirk refinery. The French major said it plans to end refining activity at this plant in northern France, which it idled in September 2009, and dismantle the facility by 2013. The reason given was poor refining economics.

In May 2009 Petroplus closed its Teesside refinery in the UK with a view to sell it or convert to a storage facility. Repsol has also been temporarily restarting and shutting its 100,000 b/d Cartagena refinery since April 2009.

So crude sellers have reset their policies. Russia has built a pipeline flowing eastwards from east Siberia to open up and encourage exports to Asia.

Saudi Arabia has taken up storage facilities in Japan as has Brazil’s Petrobras. Other Middle Eastern producers are also increasingly looking to the east to place oil production.

Flows of crude oil east from the Black Sea and the Mediterranean have also become more commonplace.

Up to November of last year Russian crude export flows were limited to exiting the country through Baltic and Black Sea ports or through the Druzhba pipeline to Europe.

But in November 2009, Russia’s state-owned pipeline operator Transneft commissioned the new 2,757-km ESPO oil pipeline from Taishet in east Siberia to Skovorodino as well as an oil terminal at Skovorodino. Skovorodino is in Russia’s far eastern Amur Region near the border with China. (See related map: Eastern Siberia-Pacific Ocean (ESPO) crude oil pipeline).

In a bid to stimulate investment and growth in the remote oil province in east Siberia and exports to Asia, the Russian government announced an exemption from crude oil export duty for eastern Siberian crude with effect from December 1 2009.

The number of fields currently enjoying the tax exemption totals 13, while Russia is said to be considering increasing this number to 18.

According to Russia’s energy minister Sergei Shmatko the zero rate export duty is likely to last a minimum of 5 to 7 years.

Transneft invested an estimated Rb 420 billion or $14.4 billion in the construction of the first stage of the ESPO pipeline. Exports via the Russian port of Kozmino on the Pacific Ocean arrive by rail from Skovorodino.

Currently the pipeline from Taishet to Skovorodino has a capacity of 600,000 b/d while the capacity over the final rail tranche of the journey east is 300,000 b/d. CNPC is building a 300,000 b/d offshoot from Skovorodino to China which is expected to be complete by the end of 2010.

The second stage of the project will involve extending the pipeline from Skovorodino to Kozmino and to expand overall capacity. Capacity is slated to grow to 1 million b/d by 2012 in the second stage of the project and to as much as 1.6 million b/d at a later date.

The export rate during 2010 is expected to average 300,000 b/d. According to Transneft, when the route is expanded to the planned maximum capacity, 300,000 b/d will go to China, 400,000 b/d will be sent to a new refinery Rosneft plans to build near Kozmino and around 200,000 b/d to 300,000 b/d will be sent through the route to existing Far Eastern refineries in Komsomolsk-on-Amur and Khabarovsk.

This would imply that the remaining 600,000 b/d to 700,000 b/d could be exported from Kozmino although it is not currently clear when the route will be expanded to this maximum capacity.

On November 30, 2009 the first rail cars carrying 4,890 mt of crude oil destined for export left the Skovorodino pipeline delivery station, which has a storage capacity of 80,000 mt. The station has a loading installation for 82 rail tanks with a loading capacity of 35,000 mt/day.

Around 1 million mt/month up to early April of ESPO crude has been tendered so far this year. Oil-thirsty Asia has absorbed the majority of the crude although some has also gone to the US, including Hawaii.

Russian crude now has a regular outlet to the Asian market and is expected to play a pivotal role in pricing. To date imports of crude oil to Asia have typically arrived from the Middle East and Africa. (See related chart: US & China crude oil imports ($/bbl): Jan. 2007 - Jan. 2010).

With the point of source and point of demand separated by a significant distance Asia has paid a premium for supplies. The presence of regular flows from Russia is expected to reduce this premium.

“Spot ESPO crude supply could create a new regional benchmark by 2014 when the new Russian crude exports volume is expected to reach 1 million b/d, but the key is to have more than 300,000 b/d of the crude's spot supplies,” a senior official from Japan’s Nippon Oil told Platts in early March 2010.

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