IHS Global Insight Perspective | |
Significance | Completion of the crude oil pipeline section to the Amu River crossing is a major milestone in attempts to build the Skovorodino to Daqing line, which could eventually support crude oil exports to China of 30 million t/y, potentially rising to 50 million t/y supporting CNPC's refining base in northern China. |
Implications | The opening of the link also demonstrates China's success in using its financial clout and CNPC's partnership with Rosneft to advance access to Russia's crude oil production streams, which can start helping to diversify reliance on imports from the unstable Middle East region. |
Outlook | The completion of the section is indicative of growing energy co-operation between Russia and China, in line with deepening political ties between the two countries; they also have plans for developing a joint-venture refinery and exporting gas to China, although efforts to boost co-operation have been slow moving, perhaps due to hard bargaining by China, which has additional gas supply alternatives. |
Russia and China Complete Crude Spur
Yesterday Russian prime minister Vladimir Putin officially opened an 84-km section of a crude oil pipeline spur running from Skovorodino in Eastern Siberia to the Amu River/Heilongjiang River crossing point on the border between Russia and China. Putin opened the valve on the pipeline, paving the way for test operations and the filling of the pipeline to begin, which is expected to take three or four days. The pipeline-opening ceremony was attended by officials from China's National Development and Reform Commission (NDRC) and from China National Petroleum Corp. (CNPC), who listened to a speech by Putin stating that the realisation of the project demonstrated the fruitful results of Sino-Russian strategic co-operation while opening up new market opportunities for exports of crude oil into the expanding Chinese market, diversifying Russia's dependence on European countries as crude oil export partners. Putin stated that completion of the pipeline spur would pave the way for eventual crude oil exports to China of 30 million t/y, potentially rising to 50 million t/y compared to the 120–130 million t/y exported from Russia to European partners.
Completion of the Russian section of the crude oil pipeline spur follows Russian pipeline operator Transneft's completion of the 2,694-km first stage of the pipeline running from Taishet in Irkutsk Oblast to Skovorodino in Amur Oblast, which has a capacity of 30 million t/y in December 2009 (see Russia - China: 29 December 2009: Transneft Formally Launches First Leg of ESPO Pipeline). In February 2009 Russia's Transneft agreed to the construction of a new branch of the pipeline from Skovorodino to China's crude oil production hub of Daqing, as part of a raft of deals that also included two loan agreements for US$25 billion between the China Development Bank and Russian companies Rosneft and Transneft and one oil supply agreement between CNPC and Rosneft. The loans were expected to underpin construction of the crude oil pipeline spur and help to refinance Rosneft's debt, as well as underpin development of large oilfields such as Vankorskoye in Eastern Siberia, in return for guaranteed supplies of crude oil to China. The finalisation of the agreements marked a second success for China's strategy of using its financial clout to expand its influence in Russia's oil sector and secure supplies. Indeed, in 2004 a US$6-billion loan was extended by China to finance Rosneft's acquisition of Yuganskneftegaz in return for the finalisation of long-term oil delivery contracts between Rosneft and CNPC. The Chinese government is keen to boost imports of crude oil from Russia to diversify reliance on the unstable Middle East region for oil, and CNPC is also keen to use Russian crude oil as feedstock for its refinery expansion plans in northern China.
Looking ahead, Prime Minister Putin expressed his absolute confidence that Russian oil would start to enter China this year, despite the fact that the 926.84-km section of the crude oil pipeline spur running from Mohe County in Heilongjiang Province to China's crude oil production hub of Daqing has not yet been completed. Construction of this section of the pipeline was launched in May 2009, and in June 2010 CNPC announced that welding on the pipeline had been finished, around five months ahead of schedule. In March 2010 Russian news agency RIA Novosti also reported that construction of a tunnel running beneath the Amur River had been completed, which would accommodate the pipeline section, marking significant progress on one of the most technically challenging aspects of the project. The Chinese section of the pipeline spur will run through five cities and 12 counties in China and construction is due for completion sometime in September 2010, with filling and commissioning due to begin in November 2010.
Outlook and Implications
Completion of the pipeline section is indicative of growing energy co-operation initiatives between Russia and China in line with deepening political ties between the two countries. Nevertheless, other plans to expand bilateral co-operation still face many potential pitfalls. CNPC and Rosneft have also discussed the latter's participation in a joint venture refinery in the city of Tianjin in China. Rosneft was probably keen on this agreement to gain a stake in China's downstream sector to complement its interests in the upstream side of the project, given concerns from the Russian government of simply becoming a resource depot to meet China's growing energy needs. However, Rosneft's hopes that the refinery could be integrated with the ESPO project appear to have been undermined by CNPC, who has allocated ESPO crude instead to its Liaoyang refinery in north-eastern China. Feasibility studies have been completed on the Tianjin refinery, although these were based on the assumptions that the refinery would be supplied with crude oil from Russia and the Middle East. Securing an alternative crude oil supply source is now a major issue for the planned project, which could have a capacity of 200,000 b/d. Officials from Rosneft have indicated that they might have to bid in the spot market if extra crude oil is required from Russia to supply the facility. In July 2010 a Rosneft official said a final investment decision (FID) would be made on the refinery by August 2010, following planned meetings between the two companies, although whether the project will go ahead remains uncertain at this point.
In addition, there are plans for China to import natural gas from Russia, as evidenced by a memorandum of understanding (MoU) signed between CNPC and Gazprom in 2006. CNPC has been keen to access natural gas from West Siberia, which it would like to be delivered through Russia's pipeline network to Altai at the Sino- Russian border and then exported to Xinjiang Autonomous Region, where it could enter China's existing pipeline network. Rapid gas demand growth in China, which is projected to increase from 83 bcm/y in 2009 to over 200 bcm/y by 2020 has made CNPC extremely interested in Russian gas, although securing a supply agreement has been complicated by gas pricing negotiations. Although it has been announced by China's National Energy Administration (NEA) that the price of natural gas will be linked to crude oil, more detailed commercial terms remain to be negotiated. Russia has some of the largest proven gas reserves in the world, which alone make CNPC very interested in progressing this project, as it would help to win further market share from Sinopec and China National Offshore Oil Corp. (CNOOC) in China's gas market. The gas shortages China experienced in the winter of 2009/2010—although more caused by a lack of storage capacity than supplies—were a stark reminder of what could happen if China's NOCs failed to secure adequate gas supplies, particularly as the company incurred rare criticism from state media. Nevertheless, CNPC does have other options for importing gas, notably from Turkmenistan, which has the fourth largest gas reserves in the world. CNPC already secured an agreement with Turkmenistan to build a second pipeline to complement the Central Asia Gas Pipeline, which kicked off production at end-2009. China has already provided a US$4-billion loan to Turkmenistan and the Turkmen government is now seeking a further US$4.1-billion loan for development of the supergiant South Yolotan field. If this deal goes ahead, the near-term need for Russian gas supplies could be reduced particularly as PetroChina, CNPC's limited liability company, has also been moving to secure additional gas supply agreements from Australia.