Russia's invasion of Ukraine has seen some of the harshest sanctions ever imposed on a nation and disrupted trade flows of energy and other commodities, even though such goods have not been directly sanctioned.
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Russia was China's second largest crude oil supplier in 2021, accounting for around 15.5% of China's total imports.
Chinese buyers of spot Russian crude are temporarily refraining from closing deals following uncertainty around shipping. Independent refiners, most of whom highly favor Far Eastern Russian grade ESPO, have decided to halt purchases until more clarity on the implication of sanctions emerges. Some of China's top state-owned banks are taking precautionary measures and have stopped issuing Letters of Credit for trading or purchasing Russian commodities.
But, Asia's biggest oil consumer is also closely watching the situation evolve as it has the appetite to absorb incremental cargoes if other buyers decide to cut purchases from the leading European supplier, several China-based market sources told S&P Global Commodity Insights.
Below, S&P Global looks at the oil ties between the two countries.
-- Russia is the second-largest crude oil supplier to China, delivering 1.6 million b/d, or 79.65 million mt, of crude in 2021, data from China's General Administration of Customs showed. Although the volume of crude that flowed from Russia fell 4.6% on the year in 2021, its market share edged up to 15.5% from 15.4% in 2020 as China's total crude imports fell 5.1% from a year earlier.
-- China imports crude from Russia via both pipeline and on sea with the proportion equally split.
-- State-owned CNPC has term deals to import 40 million mt/year of pipeline crude from Russia, comprising 10 million mt/year via Kazakhstan through the Atasu-Alashankou pipeline under a bilateral state agreement, and 30 million mt/year of ESPO Blend from Rosneft via the Skovorodino-Mohe pipeline to its PetroChina refineries.
-- On Feb. 4, CNPC and Rosneft signed an agreement for supplying 100 million mt, or around 200,000 b/d, of crude oil to northwestern China through Kazakhstan for 10 years. This agreement is more likely an extension of the current contract via the same pipeline which will expire next year.
-- China's Independent refineries have almost finished ESPO procurement for April cargoes and have raised concerns that the sanctioning of Russian shipowners is creating problems like opening Letters of Credit that prevent traders from supplying them with Russian crude. They have said that they will need to wait and see if loadings and payment operations are smooth.
--May ICE Brent crude oil futures extended gains to $125.38/b in mid-morning Asian trade Mar. 8 in the wake of reports that the Biden administration was discussing a potential ban on Russian oil imports.
-- Urals is priced against Platts Dated Brent, but supplies for crudes from the Far East are priced against Platts Dubai crude assessments, allowing Russia to sell ESPO and Sokol cargoes competitively, given the Middle Eastern benchmark's more than $15/b discount against Brent as of Mar 7.
-- S&P Global assessed light sweet Far East Russian Sokol crude at a discount of 25 cents/b to Platts Dubai crude assessments on CFR Yeosu basis March 7, marking the lowest price differential since Platts Dubai minus 50 cents/b assessed Nov. 5, 2020.
-- Second-month ESPO crude was assessed at Platts Dubai minus $1/b on a FOB Kozmino basis March 7, the medium sweet crude's lowest spot differential since Platts Dubai minus $1.15/b May 13, 2020.
--Light sweet Sakhalin Blend was assessed at a discount of $1/b to Platts Dubai crude assessments on CFR Northeast Asia basis Mar. 7, its lowest price differential since Platts Dubai minus $1.05/b assessed June 1, 2020.
-- Most of China's refineries are able to crack Russian crudes -- ESPO, Urals, and Sokol -- which can be alternatives to sour crudes including those from the Middle East and US.
-- Russian ESPO crude, which flows to China via pipelines, is not only a hot favorite among China's Shandong-based independent refineries, but also the solo feedstock for one or two refineries of state-run PetroChina in the northeastern region.
-- The China-Russia pipelines -- which connect with Skovorodino-Mohe pipeline to carry ESPO Blend crude from the Mohe border station in China to Daqing in the northeastern Heilongjiang province -- are running at full capacity of 30 million mt/year, or 600,000 b/d, to fulfil the contract between CNPC and Rosneft.
-- The room to increase imports via the Atasu-Alashankou pipeline is limited at around 100,000 b/d. This pipeline has a capacity of 400,000 b/d, of which 200,000 b/d is being used to import Russian crude under the CNPC-Rosneft deal, while China's crude imports from Kazakhstan was at 90,200 b/d in 2021.
-- China's SPR sites in Dushanzi, Shanshan and Lanzhou are connected with the Atasu-Alashankou pipeline through domestic pipelines. Capacity of these sites amount to 16 million cu m or 103.15 million barrels of crude.
-- Russia's seaborne spot crude exports to China include ESPO Blend loaded from Kozmino, Sokol from De-Kastri and Sakhalin Blend from Prigorodnoye, as well as Urals loaded from the Russian Black Sea port of Novorossiisk.
-- In the Far Eastern port Kozmino, full transportation capacity for ESPO has been increased to 80 million mt/year, with shipments to all buyers reported at 40 million mt in 2021.
-- China's total crude inventory – commercial and strategic -- has fallen to 870.1 million barrels in February, from a record high of 972.1 million barrels in September 2020, according to Kpler shipping data, suggesting there is room to absorb more barrels.