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Russia crude oil pipeline capabilities to mainland China—The ESPO crude oil pipeline
01 April 2022Carol Zu
Key implications
In the case of pipeline supply disruption to Europe, Russia
needs to look to alternative markets in Asia, given that it has no
strategic petroleum reserve (SPR) system.
Insufficient crude oil pipeline transmission capacity will
limit how much additional oil Russia can send to mainland
China.
Mainland China's demand for Russian crude will remain stable
since local refineries favor the ESPO blend.
The possibility of a supply disruption to Russian oil owing to
the Russian-Ukraine crisis has caused a physical and financial
shock to the global crude oil market. Russia is a significant crude
oil exporter in the world, although it is the third-largest oil
producer after the United States and Saudi Arabia. Preinvasion
Russian crude oil exports were approximately 4-5 MMb/d. Currently,
Russian crude oil exports have reduced, and further reductions are
likely. Understanding the crude oil disposition capacity and
capability is important as the situation evolves post-invasion in
the global crude oil market. What are the current crude oil
pipeline disposition outlets and what are the possible implications
from further reductions in Russian crude oil exports?
The disposition of crude oil from Russia has several outlets. A
critical outlet for Europe is via the Druzhba pipeline. The Druzhba
pipeline delivers crude oil from Russia to Poland and Germany
through Belarus, Hungary, Slovakia, and Czech Republic via Ukraine.
However, if the situation escalates further and impacts Russian
crude oil exports, where can the surplus Russian barrels go? Are
there alternative routes that Russia can redirect the pipeline flow
to beyond Europe? Is incremental offtake to the east and mainland
China an option?
The following map illustrates existing Russian oil related
infrastructure, highlighting oil pipelines, refineries, and oil
storages that are currently operating. For level setting purposes,
Russia has an export capability of 11 MMb/d for crude oil and
refined products, and a total operating oil storage capacity of
96.8 MMbbl. The largest crude oil storage is the 10.6 MMbbl Omsk
Refinery owned by Gazprom Neft, followed by a 7.3 MMbbl
Novorossiysk Marine Terminal, owned by Caspian Pipeline Consortium.
However, Russia does not own and operate an SPR. While an SPR
enables a country to stock up crude for times of supply shortage,
it also can in this circumstance, soak up the immediate surplus.
Without SPR, Russia theoretically has less supply flexibility and
can only manage downstream consumption decreases by production
cuts. Correspondingly, if the Russian crude oil exports are
reduced, alternative outlets are minimal to nil in-country.
In contrast to Russia's lack of crude oil storage facilities,
its neighboring country and biggest oil consumer mainland China has
12 SPR sites in operation totaling 249.7 MMbbl and is contemplating
another 5 more going forward. Russia exports nearly 50% of its
crude oil and refined products via long-distance pipelines with the
balance waterborne liftings and trade. It has the two longest oil
pipelines in the world, the Druzhba to the west, and the east, the
ESPO oil pipeline. In addition to these major pipelines waterborne
crude oil liftings via Very Large Crude Carriers (VLCCs),
medium-size Aframax tankers, and other vessel sizes and types
provide additional Russian crude oil disposition options. The focus
here is on the east side of Russia and the ESPO oil pipeline. The
following map shows Russia's pipeline export route to Asia via the
ESPO oil pipeline. The 4,857-km ESPO oil pipeline starts from
Taishet in eastern Siberia, sending oil to the Pacific Ocean
terminal at Kozmino. The ESPO oil pipeline was built and operated
by Russian pipeline company Transneft and construction of the
pipeline started in 2006 and was completed in 2012.
The ESPO oil pipeline is the key route of Russia oil to reach
its key consumers in Asia, including mainland China, Japan, and
South Korea. Under the current Russia-Ukraine war situation,
Japanese and South Korean companies have backpedaled trading
activities with Russia, while mainland China remains to be an
outlet for Russian oil.
Deliveries of Russian oil via the ESPO oil pipeline to mainland
China started in 2011. Crude oil is injected into the 942-km
mainland China branch of the ESPO oil pipeline and further into the
Northeastern oil pipeline network. The mainland China branch
pipeline was built and is currently operated by the China National
Petroleum Corporation (CNPC) with an initial annual transportation
capacity of 15 million metric tons (MMt) per year, approximately
0.3 MMb/d1. CNPC launched several projects to lift the capacity to
20 MMt to date. To further strengthen its oil connection with
Russia, mainland China built a parallel line in 2018 to receive an
additional 15 MMt from Russia each year. The two lines currently
have a combined annual capacity of 35 MMt per year (MMt/y),
approximately 700,000 b/d.
Crude oil import by ESPO has made Russia the largest oil
exporter to mainland China, overtaking Saudi Arabia. In 2021, Asian
refineries imported 2.4 MMb/d or about 120 MMt/y of Russian oil via
the ESPO oil pipeline and waterborne routes, with over 80% of the
oil delivered to mainland China.
Under the current war circumstances, is it possible for Russia
to direct more west-word crude to the east? There are likely
commercial limitations to delivering incremental crude oil to the
east via the ESPO oil pipeline. Russia and Mainland China market
participants signed a long-term oil supply contract in 2012 for an
estimated annual volume of 15 MMt for the term of 20 years. The
commercial negotiations for the supply contract took the two
countries 15 years before it finally concluded the commercial
negotiations and executed a supply contract in September 2012. The
negotiations for additional supplies and a new supply contract are
unlikely to be concluded over a short period of time.
Russia, however, has a second route to supply oil to mainland
China. Rosneft has signed a 10-year contract with CNPC in February
to extend its oil supply through Kazakhstan via the
Atasu-Alashankou pipeline. The contract is for a total of 100 MMt
of crude over 10 years, or 200,000 b/d. The Atasu-Alashankou
pipeline, commissioned in 2006 by Kazakhstan-China Pipeline
Company, has a designed capacity of 400,000 b/d. The pipeline has
previously been used to transport oil from Russia to mainland
China. During 2014-16, 140,000 b/d of Russian crude was sent to
mainland China, and also during 2017-21 as 200,000 b/d of Russian
crude was sent to mainland China. The Atasu-Alashankou
pipeline—despite the existing spare capacity of 200,000 b/d
after being assigned for the new Russia-mainland China
contract—is not a solution for the standing issue owing to the
relatively small designed capacity.
The estimated ESPO oil pipeline capacity for deliveries to
mainland China for Russian oil is approximately 35 MMt/y, higher
than the 30 MMt/y designated by the supply contract. Assuming the
volumes available are more than the pipeline's capacity, mainland
China traders have the ability in an unconstrained world to import
ESPO blend taking waterborne. The ESPO oil pipeline crude blend is
favored by mainland China refineries, particularly refineries in
the Northeastern provinces, and the tea-pot refineries in the
Shandong province. The following map shows pipeline connections
with CNPC refineries and tea-pot refineries in Shandong.
CNPC has recently upgraded its Daqing Petrochemical refinery to
process 3.5 MMt/y of Russian Oil. The refinery joined the existing
fleet with Dalian Petrochemical, Liaoyang, Jilin, Jinzhou, Jinxi,
Harbin, and WEPEC. These refineries process ESPO blend with
indigenous oil production, with the ESPO portion ranging at
15-50%.
Mainland China has currently a total of 38 independent or
so-called tea-pot refineries with a combined capacity of 2.53
MMb/d, approximately 126 MMt/y. This figure excludes those
refineries that have been acquired by large companies such as by
ChemChina and Norinco. ESPO is the blend at these refineries,
followed by the Urals. IHS Markit research shows ESPO import ranges
from 1.5-2.5 MMt per month via ports at the Shandong coast.
In summary, we believe that the ESPO pipeline is a critical
route for Russian oil to reach its key consumer, mainland China.
However, this pipeline seems to be at its capacity even before the
Russia-Ukraine crisis, and it is unlikely for Russia to be able to
increase its existing supplies to mainland China via this route.
The other pipeline, the Atasu-Alashankou Pipeline, has limited
spare capacity. The insufficiency in oil transmission capacity will
force Russian barrels to take sea routes to mainland China if
Russian ships continue to be diverted from countries that have
imposed self-sanctions on Russian crudes. Chinese demand for
seaborne Russian crude—particularly the ESPO blend and
Urals—will remain stable because these are the preferred grades
run by most of the independent/large refineries that are owned and
operated by national oil companies.
For more information on S&P Global's Oil
Markets, Midstream, and Downstream research and analysis, visit
ihsmarkit.com/OMD
Posted 01 April 2022 by Carol Zu, Director, IHS Energy Midstream Asia
This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.