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Siberia OilOil analysts speculate over OPEC capabilities, shale production and product demand in hopeful scenarios to satisfy a bullish investor environment. The reality is with the U.S. shale presence Russia and Saudi Arabia exports matter and Chinese oil refineries are the prize. U.S. investors forget that Russia has it's problems and oil revenue is crucial. Saudi Arabia has already postponed it's Aramco IPO, they clearly have issues also. 

Neither can afford to lose more petro dollars and there lies the rub, it's fine for Russia's oil leaders to tell Nigeria or Iraq to lower production. Its fine for KSA to bully Qatar but at the end of the day ALL these countries need oil revenue. Meantime shoring up clients is key, the last thing they want is the U.S. taking their customers and guess what, it's happening. Russia overtook the Saudis for five months so far in 2017 as China’s top crude supplier and intends to increase the gap going forward.

Chinese customs data showed Russia supplied an average of 1.18 million bpd in the first seven months of 2017, versus Saudi Arabia’s 1.05 million bpd.

China is the world's biggest crude oil importer and is the prize for all. Russia is set to export more oil through the expanded East Siberia Pacific Ocean (ESPO) pipeline network from January 2018 with the Skovorodino-Mohe pipeline. This will further strengthen Russia’s position as China’s largest oil supplier ahead of Saudi Arabia. The supply contracts were signed back in  2013 in a market place that has seen U.S. oil pick up any tightening slack and OPEC and Non-OPEC in a promised production deal that has gone on at least a year longer than envisioned. The one consistency here is all the OPEC producers are cheating.

Rosneft, who is Russia’s top oil producer under a government agreement is to supply 30 million tonnes of ESPO Blend crude to PetroChina in 2018, or 600,000 barrels per day (bpd) under the deal. That is an increase of 50 percent from this year. Rosneft will supply China National Petroleum Corp $CNPC the parent of PetroChina, with 28.3 million tonnes of oil via the Skovorodino-Mohe pipeline in 2018, the remaining 1.7 million tones of ESPO Blend will be loaded via the Kozmino port.

“Rosneft has enough resources to supply under all its existing contracts, including the planned increase of supplies to China by 10 million tones next year,” Rosneft said in a statement emailed to Reuters on Thursday.

PetroChina has designated three refineries in northeast China for the Russian oil, with one of them undergoing an $880 million upgrade reports Reuters with Liaoyang Petrochemical Corp, in Liaoning province, already a regular processor of Russian oil, is expected to double its refining capacity with the upgrade to 400,000 bpd by the end of 2018, said two refinery sources. 

East Siberian Pipelines

Do you think Russia will leave these contracts unfullfilled or fill them at the expense of other clients or domestic demand? That leaves one choice, increase production.

Reuters reported a PetroChina trading executive said seven plants in northeast China are already taking Russian oil, but once upgrade works complete, plants in Liaoyang, Dalian and Jilin will be the main processors. “Plants were told to be prepared for more Russian oil next year ... Liaoyang will be the main participant as it’s poorly located for seaborne shipments,” said one of the refinery sources.

“It’s about boosting efficiency by dedicating these three plants to Russian oil,” said the executive.

Saudi Arabia has been negotiating for years to get a piece of a Chinese refineryfor it's now postponed Saudi Aramco IPO. Rosneft, or Russia is not about to take the foot off the accelrator on their project. The Saudi energy minister last month said he will complete a deal with PetroChina early next year to invest in the 260,000-bpd Yunnan refinery in China’s southwest that started operations this past July. Aramco needs supply deals like this. Saudi has a separate supply pact with state-run China National Offshore Oil Corp with a new 200,000 bpd plant in south China.

Indeed the deal hails all the way back to the GFC when China wrote an estimated $50 billion in loans to Moscow. It is also in China's interest for higher Russian pipeline sales. Russia will secure the additional barrels for ESPO deliveries mostly by raising production at it's two new East Siberian oilfields, Kuyumba and Messoyakha that launched last year. Should they have to fulfill the contracts by diverting from export routes to the west they will be mindful of increasing production on other fields.

Source: Reuters, Rosneft

From The Traders Community Research Desk

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