Russia seeks greater energy cooperation with Asia amid crude demand uncertainty

Russian and Asian investors are meeting in Vladivostok this week, amid uncertainty over crude demand levels after the spread of the Delta variant of the coronavirus combined with recent adverse weather conditions to hit differentials for Russian crude shipped via the Far East.

Panel sessions at this week's Eastern Economic Forum in Vladivostok will cover energy transition plans in the region, including the island of Sakhalin's aim to be carbon neutral by 2025, according to a preliminary program of the event. Russian companies are increasingly looking to reduce the environmental impact of resource and industrial production, including through carbon capture and storage, as well as developing renewables and hydrogen production.

Analysts see Rosneft's major Vostok Oil project, and new LNG capacity projects as possible areas of new energy cooperation. Asian investors have previously committed to oil and gas projects in eastern Russia, and may seek to join new projects to secure crude and LNG supplies.

Price dynamics

Russia's oil supplies to Asia include deliveries via the East Siberia Pacific Ocean pipeline, as well as shipments from the port of Kozmino, and the island of Sakhalin.

In recent weeks, Russia's Far East crude price differentials to Platts Dubai benchmark crude have been under pressure, amid weaker demand from China and South Korea, after tepid fuel consumption led to a spike in crude and oil product stockpiles.

S&P Global Platts assessed Sakhalin Blend CFR Singapore at a premium of $3.20/b to the front-month Dubai crude assessment Aug. 31, down from $4.20/b at the start of August. Platts assessed ESPO FOB Kozmino at a premium of $1.95/b on Aug. 31, down from $3.25/b at the start of the month. Platts assessed Sokol CFR Japan at a premium of $2.90/b, down from $4.50/b at the start of August.

Analysts now expect to see some crude demand recovery in Asian markets over the next few months.

S&P Global Platts Analytics says there is likely to be some Chinese demand recovery, due to the authorities bringing the spread of the Delta COVID-19 variant under control, as well as the fall holiday season, and industrial recovery driving an increase in demand for oil products.

It expects China's September oil demand to rise to 15.32 million b/d, and average Q4 demand to stay above 16 million b/d.

Platts Analytics also forecasts a recovery in Indian oil demand.

"In absolute terms, after a drop of around 230,000 b/d in Q2 over the previous quarter, India quarter-on-quarter oil demand is expected to increase by 185,000 b/d in Q3 and as much as 525,000 b/d in Q4, driven by a more broad-based pickup in economic activity amid widening vaccination rollout," Platts Analytics said.

Risks related to potential negative developments in the coronavirus pandemic continue to fuel uncertainty over the demand recovery.

Potential new cooperation

Russia is also looking to build on existing energy cooperation with Asia. In recent years Russian companies including Rosneft, Sibur, Gazprom and Novatek have held frequent talks with Indian and Chinese partners on new projects. Major infrastructure projects including the ESPO oil pipeline, the Power of Siberia gas pipeline, and the Northern Sea Route are increasing Russia's ability to ship its vast resources to Asian consumers. This has helped the country to significantly diversify its customer base in recent years.

"The Asian markets have been a critical demand arena for Russian energy players over the last few years. With the capacity and the infrastructure in place, Russia has been able to capitalize on the growing demand not just from China but also from the rest of South East Asia," according to Alex Metherell, co-head of Global Banking at VTB Capital.

"The COVID pandemic has put a temporary slowdown into the product growth trajectory, but as volume charts suggest this has been rapidly reverting back to the growth trend over the last six months," he added.

In recent years, Russia has secured Asian investment in major new energy projects. This helped to secure ongoing investment in energy projects after Western sanctions introduced in 2014 over Russia's role in the conflict in Ukraine reduced Russian companies' access to Western financing and some oil technology.

"In the oil & gas space, we think there could be some interest in Vostok Oil and any new LNG projects, especially if contracts keep prices lower than spot on average," SOVA Capital analyst Mitch Jennings said.

"When Novatek sold stakes in its Arctic LNG 2 project, we saw 30% taken by Asian investors (of the 40%) offered. Vostok Oil could be similar, but so far only traders have taken stakes in the project, but securing crude flows down the road may be interesting to some buyers," Jennings added.