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Chinese doubts over growing Russian oil trade

Western sanctions have contributed to the fall in confidence in Russian oil

There are growing doubts among some in China about Russia’s ability to continue ramping up oil exports into China as Moscow struggles to maintain production in the face of Western sanctions and declining output at its ageing oilfields. 

The growing oil trade has been at the centre of Russia’s energy pivot towards Asia and is driving increasingly lucrative trade ties between the countries, which is expected to surpass $100 billion this year. In 2014, Russia shipped around 665,000 barrels a day (b/d) of crude to China, making up just over 10% of China’s total imports. Russia is now China’s third largest crude supplier, just behind Saudi Arabia and Angola.

Russia’s export volumes to China are still only around a fifth of the supplies it sends to Europe. But that balance has been shifting to the east thanks to new capacity available through the Eastern Siberia-Pacific Ocean (Espo) and other pipeline systems that have started up in recent years, as well as increasing seaborne shipments from Russia’s Pacific coast. Russia’s crude exports to China were a third higher in 2014 than the year before and more than double the levels seen in 2010.

And there are ambitious plans to expand the trade. Those plans depend in large part on an expansion of the Skovorodina-Mohe spur of the Espo pipeline, which would increase pipeline capacity linking Russia’s East Siberian oilfields to northeast China by 300,000 b/d through the end of the decade. If successful, the expansion would allow Russia to ship as much as 1m b/d of crude to China by 2020.

But there are growing fears in Beijing that US sanctions and the decline of Russia’s mature oilfields will mean Moscow won’t be able to continue expanding its oil shipments to China. 

“Russia has been increasing its exports of crude oil to the east and reducing its export to the West. In 2014, its eastward exports increased by 230,000 b/d and westward exports plunged by 440,000 b/d,” Chen Bo, the head of Sinopec’s oil trading unit Unipec, told a conference in Beijing. “But Russia’s crude oil production and total exports are likely to decrease. In terms of Espo crude oil, it is still not certain whether Russia will have enough supplies to fill the pipelines.”

Bo added: “In the mid- to long-term, due to the decreasing production of oilfields in Western Siberia, insufficient input in the upstream exploration and development, and lack of infrastructure in the Far East, it is not certain whether Russia’s crude oil production will continue to increase… These changes will have some negative impacts on China-Russia crude oil trade cooperation.”

In February, the International Energy Agency (IEA) warned that Russia’s oil sector would be the biggest casualty of the oil price fall. The country’s output “is expected to swing into contraction over the medium term due to the crushing impact of lower oil prices and Western sanctions”, the IEA said in the latest version of its closely watched Medium-Term Oil Market Report. The IEA now expects Russian output to fall by 560,000 b/d between 2014 and 2020, compared to its previous forecast of 200,000 b/d of growth. The combination of sanctions and lower oil prices are making it difficult to finance new projects needed to help offset falling production from the mature West Siberia fields.

Mikhail Margelov, a vice president and Russia’s Transneft, which operates the Espo pipeline, acknowledged the immediate problems caused by the sanctions, but sought to downplay their long-term effects. “We have had some delays to our construction projects. The sanctions are making it difficult to work with some of our sub-contractors,” Margelov said in Beijing. “However, the delays are not critical so I don’t think we will miss our major deadlines.”

Chinese officials have used Russia’s struggles to push Moscow into opening its upstream business to China’s state oil companies, something Russia has been cool on in the past. Moscow has opened the door to Western oil majors such as ExxonMobil and BP, which have technology Russia needs, in a way it hasn’t done for Chinese companies. “We hope Russia will open its upstream sector to Chinese companies to ensure oil production growth,” Chen said. 

That view was echoed by Yang Lei, an official at China’s powerful economic regulator, the National Development and Reform Commission. “China can participate in the development of oilfields in East Siberia. We have advanced technology to revitalise old fields and in other areas. We are happy to share that technology,” Yang said.

There are some signs of change in Moscow. Last year, president Vladimir Putin said that China National Petroleum Corporation (CNPC) would be able to invest in the 3.6bn barrel Vankor oilfield, a jewel in Russia’s upstream crown. In November, CNPC and Rosneft signed a framework deal for CNPC to acquire a 10% stake in the field, thought to be worth around $1bn, but there has not been any progress since. 

The negotiations will be closely watched ahead of Xi Jinping’s visit to Moscow in May to mark the end of World War II, when the countries are expected to announced a fresh round of energy deals.     

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