Russian oil companies view China as one of the top priorities

Domestic oil majors have recognized China’s huge potential as a future market for Russian oil and are making the first steps toward establishing a presence there -- but hurdles lie ahead. "In the last few years, the Chinese market has been one of the most dynamic markets in the world in terms of energy consumption, and Russia doesn’t have any other potential oil buyer with such huge needs that is located as close as China," said Gennady Krasovsky, an oil and gas analyst at NIKoil brokerage in Moscow.
Krasovsky said that within the next 10 years China’s needs for oil are likely to increase by 10 % to 120 mm to 130 mm tpy. As Russian oil companies look at expansion to international markets, they view China as one of the top priorities.

Last year, Yukos, Russia’s largest oil company, more than doubled oil deliveries to China by railway to 3.5 mm tons from 1.5 mm tons the previous year. Sibneft also entered the Chinese market, delivering 40,000 tons of oil to Chinese customers, and is planning to continue exporting oil to China this year. "We’ll deliver as much as the market will allow us," a spokesman said.
Russia’s No. 2 oil producer, LUKoil, exported 11,000 tons of refined oil products to China and Mongolia by railway, although there were no supplies of crude oil, Olga Sergeyeva, a spokeswoman for LUKoil said. But despite China’s substantial economic growth of 7-8 % a year and its proximity to Russia’s huge oil deposits in East Siberia, the Chinese economy has so far consumed very little Russian oil, and the deliveries by Yukos and Sibneft are much smaller than they could be, experts say.

According to analysts, what stops Russian oil companies from supplying more oil to China is the inability of the existing railway infrastructure to carry more oil. "The largest obstacle to stepping up Russian oil exports to China is the capacity of the available railways, which is roughly 4 mm tpy," NIKoil’s Krasovsky said.
Yukos plans to invest in increasing the capacity of China-bound railways, butthe problem will not be solved until an oil pipeline to China is constructed, observers say. "While Russia’s existing pipelines are all westbound, the only true solution would be the construction of a pipeline to China," Krasovsky said.
Currently, two pipeline projects that could boost Russian oil exports to China are under consideration, and Yukos has made substantial progress in preparations for implementation of a 30-mm-tons-a-year pipeline project.

Last month, after several rounds of talks conducted during an 18-month period, it struck a preliminary agreement with China’s CNPC over construction of a $ 1.7 bn oil pipeline from Angarsk to Dacin. The Chinese side agreed to take part in the financing of the 2,274 km pipeline, 1,452 km of which will be on Russian territory, and to buy at least 30 mm tpy of oil from Yukos between 2010 and 2030.
"We have completed the preparation of technical documentation for the project," a spokeswoman for Yukos said. "Now, it will be analysed for three months, after which a final decision is expected. If the decision is in favour of building the pipeline, construction work could start in October 2003 and be completed within 18 months."
"Last month’s agreement is an important step towards the implementation of Yukos’ project," NIKoil’s Krasovsky said. "Now that the project has shifted into the practical realm, Yukos’ plans to put a Chinese pipeline into operation in 2005 have become realistic."

Transneft, owner of an oil-pipeline infrastructure, has also revealed a pipeline project that could help to step up Russian oil exports to China. The construction of a pipeline between Angarsk and the Far East port of Nakhodka could be started in 2004 and completed within three years.
Upon completion of the project, oil delivered through the pipeline could be sent to China in tankers, as well as to Southeast Asia and the United States. The cost of the construction is preliminarily estimated at $ 5 bn.