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As Rosneft turns to Asia, will spot crude oil sales in the East decline further?

Summary:
Russian giant Rosneft’s recent deals in Asia suggest it is potentially shifting the balance of its crude oil sales in the region — one of its most important export markets — from a spot tender basis to long term contracts and significantly reducing the amount of Russian crude that enters the spot market in Asia. Last year the company sent 35% of its total crude exports, or around 680,000 b/d, to Asia, with South Korea, Japan and China being the main buyers. Russia’s crude exports to Asia have been rising steadily, underpinned by term contracts sealed with Chinese buyers, primarily China National Petroleum Corp. By 2018, Rosneft will raise its term sales to CNPC to over 600,000 b/d, doubling from current volumes. But Russia is already sending far more crude to China. Data from Beijing shows that Russia for the first time overtook Saudi Arabia to be China’s top crude oil supplier in May, with volumes exceeding 900,000 b/d. Russian flows again surpassed 900,000 b/d in June, although Saudi Arabia reclaimed the top spot. But Rosneft is intent on marketing even more to Asia, with chief Igor Sechin saying last month that he wanted 40% of its crude sales to go to the region by 2019. It is now looking to pin down buyers through term deals.

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Russian giant Rosneft’s recent deals in Asia suggest it is potentially shifting the balance of its crude oil sales in the region — one of its most important export markets — from a spot tender basis to long term contracts and significantly reducing the amount of Russian crude that enters the spot market in Asia.

Last year the company sent 35% of its total crude exports, or around 680,000 b/d, to Asia, with South Korea, Japan and China being the main buyers.

Russia’s crude exports to Asia have been rising steadily, underpinned by term contracts sealed with Chinese buyers, primarily China National Petroleum Corp. By 2018, Rosneft will raise its term sales to CNPC to over 600,000 b/d, doubling from current volumes.

But Russia is already sending far more crude to China.

Data from Beijing shows that Russia for the first time overtook Saudi Arabia to be China’s top crude oil supplier in May, with volumes exceeding 900,000 b/d. Russian flows again surpassed 900,000 b/d in June, although Saudi Arabia reclaimed the top spot.

But Rosneft is intent on marketing even more to Asia, with chief Igor Sechin saying last month that he wanted 40% of its crude sales to go to the region by 2019. It is now looking to pin down buyers through term deals.

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Rosneft most recently agreed to supply India’s Essar with 100 million mt over a 10-year period. This equates to 10 million mt/year, or 200,000 b/d, of crude. Before this, it also signed a deal with China’s state-owned chemicals producer ChemChina to provide 200,000 mt a month, or around 50,000 b/d, for one year. Last year it had already agreed to sell Sinopec 200,000 b/d for 10 years.

The barrels set to be provided by Rosneft in these term deals are likely to be from its crude exported from Eastern Russia, which consist largely of the ESPO and Sokol grades loaded from Kozmino and DeKastri, respectively.

Currently part of Rosneft’s sales of these two grades are done in spot tenders, which are posted on its website. However, term deals provide a stable outlet, particularly for ESPO, where production and exports have been rising steadily in recent years. Rosneft’s current allocations in the monthly loading program for ESPO from Kozmino stand at around seven cargoes of 100,000 mt or 165,000 b/d.

However, what ends up directly sold by Rosneft is a reduced number following its deal with trader Trafigura earlier this year which gave the latter the ability to sell two to three stems of ESPO produced by Rosneft each month.

This leaves Rosneft around two to three remaining stems of the Siberian crude grade to offer in spot tenders.

Most recently Rosneft offered two September loading stems of ESPO totaling 200,000 mt, equating to close to 50,000 b/d. It also offered three 95,000 mt cargoes of Sokol for September loading, amounting to about 65,000 b/d. Once the new term deals with ChemChina and Essar take effect, the question then is if these spot tenders will continue to be seen by the market in the months ahead.

One possible scenario is that ESPO production and exports will continue to rise, which should cover the increasing volumes going to term deals, as well as leaving some for monthly spot tenders.

Another alternative is that Rosneft could divert current exports of crude which go into Urals blend — sold mainly to western end-users — into the ESPO stream, further cementing its pivot to Asia.

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