Russia’s Pivot East Worries European Energy Officials
Anwar Altaqi – Esam Aziz
We know, more or less, where US oil production is going. At the end of the day, the United States would have made an important achievement if it produces as much as it consumes — an objective that is still quite far off. In other words, if we abstract the US production into a mere figure to be added to the global supply, the United States will still be a net importer. But what about Russia’s exports?
While the United States can influence the market by buying less oil from global producers, Russia can do the same by selling more to global consumers. This is a profound difference, as it gives Moscow more latitude to “re-organize” the global market and to use its exports as a geostrategic tool. In a way, this is precisely what has happened recently, much to the chagrin of the European buyers.
Russia increased its sales to China in what seems to be a continuing trend. This adds an increasing burden on European energy bills. Why it is a trend deemed to continue? Mainly because of Russia’s Eastern pivot, which is exemplified by the launch of the expanded East Siberia-Pacific Ocean pipeline that would lift Urals crude supply to China twofold, to 30 million tons annually. Russia will start moving more Urals eastward right after the launch of the pipeline extension, at a rate of 160,000 barrels per day (bpd). The overall increase of Russian crude shipments to China could be around 200,000 bpd.
This means less oil for Europe, which is Russia’s top oil client. This only highlights the significance of Moscow’s Asian pivot amid lingering European sanctions following the 2014 annexation of Crimea and Russia’s involvement in separatist conflicts in the Ukraine.
Last year, Russia exported an average of 3.7 million barrels daily to European countries, compared with less than a million bpd to China, according to statistics from the Energy Information Administration (EIA). In percentage figures, Europe accounted for 70 percent of Russia’s 2016 crude oil exports, while the share of China was just 18 percent.
But this is changing fast. The rise in exports to China has been quite steep for some time. As of November last year, Russia shipped 1.3 million barrels of oil daily to China. All the latest signs point to further growth. However, exactly how much this would hurt European buyers is unclear. But there is no doubt that European capitals are already worried.
Over the long term, things are even more uncertain. Clearly, Russia has prioritized its relationship with China. State-owned Gazprom is on track to complete the Power of Siberia gas pipeline by 2019. The 2,500-kilometer mammoth pipeline will pump 1.3 trillion cubic feet of gas to China annually.
The country is already the third-largest consumer of natural gas in the world, behind the United States and Russia, and is expected to show the strongest demand growth over the coming decades — propelling it to second place by 2040 as the economy shifts away from coal.
After the glut sparked the biggest price crash in a generation and deprived Russia of a good part of its usual oil revenues, the nation sought to boost market share in the world’s top importer. Russia now has replaced Saudi Arabia as the top exporter to China, even as the two producers lead efforts to shrink the global oversupply by curbing output. The East Siberia-Pacific Ocean system has helped its mission to increase volumes.
As the world’s second-biggest economy buys more, crude shipments from the Baltic Sea Port of Primorsk to European markets will be cut. The reason is obviously the increase in China-bound deliveries. Experts expect a drop in shipments from Primorsk in January and February, then more cuts will reduce pipeline flows to Eastern Europe in March. Shipments of the Urals grade from the port in January will likely fall by 160,000 barrels a day, compared with a year ago, while supplies from Novorossiysk in the Black Sea could remain largely flat. This explains why the Urals prices were relatively strong in December. The grade turned about 60 cents a barrel costlier relative to London’s Brent crude, the benchmark for sales of the variety.
China gets most of its Russian oil via inland pipes and seaborne shipments from the eastern ports of Kozmino, De-Kastri, and Prigorodnoye. The above mentioned second conduit between the two countries began operations on New Year’s Day, doubling China’s East Siberia-Pacific Ocean pipeline (ESPO) crude import capacity. The two lines run parallel to each other between Mohe at the border and Daqing in northeast Heilongjiang Province.
Moreover, a Chinese firm (CEFC China Energy Co.) bought a nine billion dollars stake in Roseneft. The firm started actively marketing Russian oil in a sign of expanding energy relations between the two countries.