Until now, the country has kept a low profile when it comes to its purchases of Russian oil. That has changed in recent months as China quietly increases purchases of low-priced Russian crude. The sources of this oil are Unipec, the trading arm of China’s Sinopec Corp., Zhenhua Oil, and Norinco, a conglomerate of Chinese oil firms.
Sinopec
The company is likely to buy as many as 10 ESPO shipments from Russia in May, doubling the amount it purchased before the invasion. The oil is being transferred from the Baltic Sea port of Kozmino to China’s Ustilga terminal. Chinese state-owned oil trading company Zhenhua has chartered ships to transport the Russian crude, which is currently priced at a discount of $20 a barrel below the Dubai Crude.
As Western buyers backed away from Russia after its invasion of Ukraine, China is filling the void left by the withdrawal of these buyers. At first, Chinese oil imports dropped, but the country has boosted their purchases to fill the void. In addition, China is now buying as much as 800,000 barrels a day. It is not clear whether the increase is temporary, or a blip in a long-term trend.
The new buyers are Unipec, Sinopec’s trading arm, and Zhenhua Oil, a unit of China’s Norinco conglomerate. Both firms did not respond to requests for comment, but both companies have stacked up cargoes of Russian oil to China in May. Sinopec and Livna Delivery Ltd have declined to comment.
The company hoped that China would pay a price comparable to that of Western Europe. But after the invasion of Ukraine, oil prices fell. Moreover, the European Union is finalizing further sanctions. With its oil imports in the low-priced Russian market, China had avoided committing to long-term contracts with Russia. This made the Russian barrels less expensive and less attractive for shipowners.
The two sides have their reasons for doing this. While Sinopec has been the lead buyer, independent Chinese refineries have begun quietly increasing their purchases of the Russian oil. The firm offers shown on Russian ESPO on March 14 indicate a growing interest from independent Chinese refiners. Sinopec also has a trading arm, Unipec, which is one of China’s largest foreign buyers of Russian oil.
Russia is targeting Asia as one of its target markets. Once the Kazakh oil field and Turkmenistan gas fields become fully developed, Russia may seek to assert its influence in Central Asia. This could lead to tensions between China and Russia. But, for now, Russia is not willing to budge. The country will need to find new resources in order to maintain its high levels of production.
Zhenhua
In early May, the state-owned Zhenhua, China’s smallest state-owned oil trader, loaded two Urals and two ESPO cargoes from the Port of Ust-Luga in the Baltic Sea. Zhenhua is part of Norinco, which entered the oil business more than two decades ago. In recent years, it has diversified into other areas, including investing in gas terminals.
Independent Chinese refineries are quietly increasing purchases of Russian oil, despite the war in Ukraine. While Western countries have suspended purchases of Russian oil and are investigating possible embargoes, China is buying Russian oil at a steep discount and avoiding scrutiny and US sanctions. However, the company declined to comment publicly. In an interview, an official at the Shandong refinery said it has not publicly reported its deals with Russian oil suppliers, which enables it to avoid US sanctions and scrutiny.
The withdrawal of Trafigura and Vitol from Russia created a vacuum in the market. The resulting vacuum will be filled by companies trusted by their Russian counterparts. And the low price of Russian oil is an added bonus for Chinese refiners. The price of Russian oil is lower than competing barrels, and Chinese refiners are eager to buy more. Therefore, this trend may be a long-term trend.
If Russia takes the bulk of its energy exports out of the market for the rest of 2022, a global economic downturn seems inevitable. It could be even worse than 1991, which was accompanied by a severe global recession. This is not to suggest that China is going to start importing a significant amount of Russian oil. In the meantime, China’s domestic production will likely increase, as the country is facing a shortage of oil at the moment.
Chinese refiners are quietly increasing purchases of Russian crude. Chinese state-run oil processors are looking at financing options and vessel availability. But while Sinopec remains the leading buyer, other refiners are quietly buying up Urals for future delivery. According to Transversal Consulting’s Ellen Wald, the number of cargoes arriving in China from Russia is “fairly infrequent.” But, she added, this does not mean that China has stopped buying Russian oil.
Livna
The Chinese refinery in Shandong, China, is reportedly increasing its purchase of Russian crude, but the amount of this imported crude is being questioned. The move comes as Chinese refiners struggle to survive in a slowing economy. But Chinese officials say the country is treading carefully. There are fears that the US may impose secondary sanctions, which would lead to the closure of the refinery’s Singaporean trading arm.
One ship carrier, Livna, was already shipping Russia’s Urals to European ports, but in early 2020, it began shipping Russian oil to Shandong province in eastern China, the hub for independent refineries in China. Since May, the company has loaded more than six million barrels of ESPO oil from the Russian Gulf and Baltic Sea ports for shipment to China. Meanwhile, China’s independent refiner Shandong Port International Trade Group is buying more Russian oil at lower prices, and more ESPO oil is on the way to the country’s petrodollars.
The company has agreed to buy 10 ESPO shipments from Russian ports in May, nearly double the volume prior to the invasion. These purchases could lead to an average discount of around $20 per barrel compared to benchmark Dubai crude, and could be on FOB Kozmino basis. In addition, Livna loaded seven million barrels of Russian oil from ports on the Baltic Sea, which is considered one of Russia’s export hubs.
The smallest state-owned Chinese language oil dealer, Zhenhua, has chartered ships to maneuver Russian oil from one port to another. The company’s unit North Petroleum Worldwide Co. loaded two ESPO shipments in early Could and two Urals cargoes at the Baltic Sea port of Ust-Luga in late April and mid-May. Despite these moves, China has increased its purchases of Russian oil and is reducing its dependence on foreign sources of petroleum.
Chinese companies are reportedly receiving around 800,000 bpd of Russian oil through pipelines, a number that reached two million barrels a day in May. The sales will help offset the economic damage imposed by the sanctions. Sinopec and Zhenhua, the two largest Chinese oil companies, have been purchasing about one third of Russia’s flagship export-grade blend, ESPO.
Other state-owned Chinese oil trader
The recent withdrawal of Vitol and Trafigura has left a void, but that void has been filled by a handful of companies that have been trusted by their Russian counterparts. Chinese refiners have found low-priced Russian oil to be an asset, as its cost is far lower than rival barrels. Several reasons have been identified for this shift. Read on to learn about the latest developments in the industry.
China is increasing its oil purchases from Russia at bargain prices, a sign that its government is looking to diversify its oil purchases. Western buyers have been wary of doing business with Russia since Russia invaded the Ukraine. At first, China limited its purchases, fearing they would appear to support Moscow by publicly voicing their support for its military operation in Ukraine. Moreover, if China could pay in yuan, it would probably increase its purchases.
PetroChina and Sinopec Corp. are the two companies quietly increasing their purchases of Russian oil. PetroChina is searching for ships to transport Russian oil to China. Not many shipowners are willing to take the risk. Until recently, China has been shying away from the Russian spot crude market, because of uncertainties. Sinopec and Zhenhua did not reply to requests for comment.
The latest moves by Chinese trader Zhenhua show that China is increasingly buying Russian oil at a low price. It has also increased its purchases of ESPO oil and Urals from Russia. It has also increased its investment in gas terminals, which is crucial for China’s oil needs. These are the two major reasons why China is importing Russian oil. This trend isn’t surprising since Russia is one of the largest buyers of oil.
The price of oil rose sharply in the years between 2000 and 2014, but this trend has slowed down. The price increase coincided with the rise of Vladimir Putin’s government in Russia. This drove China to look for international supplies and also changed the quality of the deals made with foreign suppliers. However, this doesn’t mean China isn’t purchasing oil from Russia. Rather, they’re making deals with Russian companies and reaping the benefits.
