21-05-08 Sinopec, Asia’s top refiner, has dropped a one-year deal to import Russian Urals crude from trader Mercuria, trading sources said, after boosting imports of cheaper Middle East oil to stem refining losses. China, the world’s number-two oil user, appears to have pre-empted the cut in Russian imports, as it has raised purchases through term deals with producers including Saudi Arabia, Iran, Kuwait and as far a field as Venezuela to fuel its rapid economic expansion.
“The deal for 2008 (Urals) renewal has been dropped,” said one Beijing-based source familiar with the supply talks with Mercuria, a European energy broker trading in Russian oil.

The scale back of 120,000 bpd of Urals crude, as agreed under the existing contract that ends in June, means the Chinese firm may have to buy similar-quality oil from origins such as Oman or Qatar, traders said. Traders attributed the suspension of the deal mostly to the wide price differential between European benchmark crude on which the Urals crude is priced and Middle Eastern oil.
“It’s very difficult to renew any contract with Chinese buyers because of the wide Brent-Dubai spread. The European formulas are not currently very suitable for Asian destinations,” said a second trading source familiar with the term talks.

China’s rigid cap on domestic fuel prices, in an effort to contain raging inflation, was partly to blame as refiners such as Sinopec Corp suffer heavy losses buying crude that is hovering near a record above $ 127 a barrel.
“One factor is Chinese domestic products prices are still too low, so Chinese refineries would buy cheaper grades to reduce technical losses. Crude like Urals tends to be too good,” added the second source.

The first source, however, cited a reason beyond prices. Sinopec’s ex-chairman, Chen Tonghai, was a strong backer of the Urals deal started about 3 years ago, but the deal was eventually shelved after Chen’s sudden departure last June, the source said.
“Although everyone knows it has strategic meaning to maintain oil imports from Russia, the deal was too sensitive for anyone else to touch after Chen left the job,” the source said, adding that another 30,000 North Sea crudes under the same deal was also dropped.

Chen, an industry veteran, was expelled from the Communist Party and faced criminal prosecution on corruption charges.
Sinopec started almost half a year ago slashing imports of Urals under the existing contract, said the first trading source, a trend reflected in the Chinese customs data showing a 23 % cut in Russian crude supply into China.