Russia will continue to increase pipeline exports of light sweet crude to Asia-Pacific in 2015, against a backdrop of flat production and heavier westbound exports.
Crude exports to eastern destinations through the Transneft pipeline system are due to exceed 50mn t (1mn b/d) for the first time in 2015, up from this year's projected 47.34mn t. Flows through the East Siberia-Pacific Ocean (ESPO) pipeline – both to Russia's far east port of Kozmino as well as through the spur to China – could reach 51.5mn-54mn t next year.
Much of the forecast growth in eastbound supplies will be light sweet crude heading to China. Russian state-controlled Rosneft is set to increase deliveries along the ESPO spur by 4.5mn t in 2015 to 20mn t, as part of an intergovernmental agreement, all while keeping steady at 7mn t transit shipments to China's CNPC through Kazakhstan's Atasu-Alashankou pipeline.
The increase in ESPO deliveries is largely contingent on growing output of light sweet crude, and Transneft expects east Siberian crude production to reach 24mn t next year, up by 2.4mn t on 2014's projection. But overall 2015 crude production will stabilise at best, with the possibility of a drop in output, as sanctions and lower oil prices cap the upstream investment needed to offset field decline.
Russian oil minister Alexander Novak says he expects oil production in 2015 to stay within a 10mn-10.5mn b/d target range, but that could mean up to a 400,000 b/d drop from current 2014 levels. Decline at mature Russian fields is averaging 11pc per year, according to Lukoil vice-president Leonid Fedun, which means the industry will need to replace 1mn b/d yearly to stabilise production. Lukoil expects production to fall by 200,000 b/d next year, but spending cuts could see that shortfall widen to 540,000 b/d.
Rising pipeline shipments east of light sweet crude amid stable-to-declining production means that Urals — Russia's traditional westbound crude export blend — could see a drop in quality. Deteriorating Urals quality is nothing new, but growing concern from both Russian and European refiners is now prompting the Russian energy ministry and state-owned pipeline-operator Transneft to consider launching a heavier grade for Europe with a higher sulphur-content – 2.5pc compared with Urals' current 1.59pc – for export through Ust-Luga terminal in the Baltic Sea.
While overall Russian production looks set for an eventual drop, total exports of Russian crude could still be up next year after the government approved new rules for calculating crude and oil product export duties. The crude export duty for next year has been reduced to 42pc from the previously planned 57pc, compared with the current 59pc for 2014, and the move has already prompted sellers of seaborne Urals to find seek out storage options for December volumes for January deferral.
A rise in exports would come at a time when Europe looks increasingly well supplied with sour crude. Competing Iraqi supplies of alternative sour grades are set to increase after a breakthrough agreement between Baghdad and the Kurdistan Regional Government (KRG), which will see Iraq's state-owned marketing firm Somo boost Ceyhan loadings by 100,000 b/d to 250,000 b/d. An additional 300,000 b/d of "Kirkuk crude" will further add to what could be a sour crude glut in early 2015.
Recent "Kirkuk" loadings have come in lighter than anticipated at close to 32°API, compared with the 29°API many market participants had earlier expected, making the grade an attractive alternative to Black Sea-loading Mediterranean Urals. And further pressure will come from Iraq's main export blend – Basrah Light – after loading delays could see some December volumes roll into the January schedule.
Somo says it expects to split the Basrah stream into a 24°-25°API Basrah Heavy grade and maintain its current Basrah Light as a separate 29°-30° API grade. The move, which should come into force by 2016, will offer eventual support to Urals values. Basrah Light exports have averaged 2.42mn b/d this year, with 22pc bound for Europe. But Somo's plan will see exports drop to just 70pc of that, cutting medium sour availability for Mediterranean refiners.
And while most Basrah Heavy would likely head to Asia-Pacific and the Americas, where more complex plants have the cokers and visbreakers to handle heavier crudes, European refiners taking the grade could still seek Urals or light sweet grades such as Caspian CPC Blend and Algerian Saharan Blend for blending. Shell occasionally seeks Urals for blending with comparable heavy sour Kuwaiti and Egyptian grades.
A recent crude supply agreement between Rosneft and India's Essar could yet relieve some more short-term pressure off the Mediterranean. Essar will buy around 10mn t/yr (200,000 b/d) of crude over 10 years, for processing at its 400,000 b/d Vadinar refinery on India's west coast. And while it remains unclear which crude Rosneft will supply, Vadinar can run heavy, high-sulphur crudes such as Urals.
A long-term arrangement for the supply of 200,000 b/d of medium sour crude to India would represent roughly 10pc of total Urals loadings in any given month, meaning the agreement could have a potentially sizeable impact on overall Russian sour crude exports next year.
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