Viewpoint: China to maintain grip on ESPO Blend crude

Exports of Russian ESPO Blend crude to China will continue to rise in 2019 as other Asia-Pacific refiners turn to alternative light crudes.

China has been the biggest buyer of ESPO Blend in the past year, lifting 65-80pc of the monthly volumes exported from the Kozmino terminal in Russia's far east. Chinese buyers took almost the whole of the seaborne ESPO Blend programme in the fourth quarter of 2018, partly as a precaution against expected falls in Iranian and Venezuelan supplies. China took more than 620,000 b/d of the light grade that loaded at Kozmino in October and November, giving the country a record 96pc share of shipments from the terminal.

Chinese buying has surged in the last few months on concerns Iranian crude shipments would fall as a result of US sanctions, and because of steadily declining supplies from Venezuela. Strong refining margins in the run-up to early October public holidays in China added impetus. China's search for alternative shipments ahead of the reimposition of US sanctions on Iran is likely to have driven imports from Russia to a new high of 1.7mn b/d in October.

China's demand for ESPO Blend has now been rising for a few years, especially after more Chinese independent refiners received crude import quotas and rights to import crude in 2016. China's imports of ESPO Blend from Kozmino are on course to hit a record high of 497,000 b/d in 2018, up from 474,000 b/d in 2017 and 472,000 b/d in 2016. China took only 306,000 b/d of ESPO Blend from Kozmino in 2015.

Pipeline supplies to rise

The Kozmino exports make up only part of China's ESPO Blend demand. It also imports ESPO Blend directly through a pipeline spur from the ESPO system as part of long-term contract between Chinese state-owned CNPC and Russian producer Rosneft. CNPC is taking 580,000 b/d in 2018 through the pipeline spur, which runs from Skovorodino to Mohe, plus 35,000 b/d on tankers that loaded at Kozmino as part of the contract. CNPC may be able to take all of the 615,000 b/d it is contracted to receive from Rosneft through the pipeline spur by 2019. This would cut Rosneft's Kozmino loadings for CNPC and potentially free up capacity at Kozmino for the Russian firm.

Rosneft has signed a new term contract to supply Chinese state-controlled firm ChemChina with up to 48,000 b/d of ESPO Blend from Kozmino in 2019. Rosneft may have signed the deal in anticipation of the extra supplies it will have available for export from Kozmino. ChemChina will likely take the crude for its own refineries in China.

Rosneft is also maintaining a long-term supply deal with Chinese private-sector investment firm CEFC. The deal began in early 2018 and volumes will rise, with CEFC expected to receive 800,000-900,000 t/month (about 210,000 b/d) of Rosneft crude through Kozmino in 2019. This implies total deliveries of 9.6mn-10.8mn t, compared with the 7.1mn t CEFC will receive in total in 2018. CEFC resells the Rosneft cargoes, usually to Chinese refiners or to trading firms that eventually move the volumes to Chinese independent refiners, which are big buyers of the grade. Chinese independent refiners bought 200,000 b/d of ESPO Blend on a delivered ex-ship Shandong basis in November for January delivery, Argus surveys indicate.

Japan, Korea cut back

Demand for ESPO Blend from the rest of Asia-Pacific has eased this year and is unlikely to recover significantly. South Korean refiners processed little ESPO Blend in 2018 as they purchased similar quality North Sea Forties crude and boosted their imports of US crude, mainly light sweet WTI. South Korea was the second largest buyer of US crude in October.

Around 26,000 b/d of ESPO Blend from Kozmino went to South Korea in 2018, but those shipments headed mainly to Yosu or Keoje, where firms including China's state-controilled Unipec have storage.

Japanese refiners, mainly JXTG and Taiyo, took about 55,000 b/d of ESPO Blend in 2018, down from 75,000 b/d in 2017 and 65,000 b/d in 2016. Japan imported 154,000 b/d of the Russian crude in 2015, before Chinese independent refiners emerged as big buyers of the grade.

The strong demand from China also curbed ESPO Blend purchases by other buyers in Asia-Pacific. Refiners in the Philippines, Thailand, Singapore and New Zealand took about 34,000 b/d this year, compared with 45,000 b/d in 2017 and 53,000 b/d in 2016. Around 103,000 b/d of ESPO Blend went to refiners outside of China, Japan and South Korea in 2015.

Most Asia-Pacific buyers have been reluctant to compete with their Chinese rivals for ESPO Blend this year, especially when prices of the crude start to surge. Chinese demand lifted Kozmino spot premiums for ESPO Blend to benchmark Dubai to four-year highs of about $6.60/bl in October.

Increased availabilities of light arbitrage crude in Asia-Pacific — from Nigeria, Libya, the Caspian and the US — have also made these grades more attractive for refiners outside of China.

Seaborne ESPO Blend exports through Kozmino could rise to more than 640,000 b/d in 2019 based on capacity requests submitted by oil producers. This compares with expected shipments of around 625,000 b/d from the terminal in 2018. Russian pipeline operator Transneft plans to complete expansion work on the ESPO system next year to increase overall capacity to 735,000 b/d from 2020, in line with loading capacity at Kozmino. But it is highly likely that most of the increased ESPO Blend export volumes will end up in China.