x Abu Dhabi, UAEThursday 18 January 2018

Gulf oil faces Russian challenge

The rising crude exports to Asia-Pacific states are eroding the regional market share of Gulf oil suppliers.

Russia is shipping record oil volumes to Asia just months after inaugurating an eastbound pipeline to carry crude from newly developed Siberian oilfields. The rising crude exports to Asia-Pacific states are eroding the regional market share of Gulf oil suppliers such as the UAE and Saudi Arabia. This is happening while those states remain obliged by their OPEC commitments to curb production.

In May, South Korean and Japanese imports of Russian crude each climbed to records of 179,000 barrels per day (bpd) and 241,000 bpd, respectively, according to government data. Japan's ministry of economy, trade and industry indicated that Japanese imports were 61 per cent higher in May than in the same month a year earlier. The first stage of the US$26 billion (Dh95.49bn) East Siberian-Pacific Ocean (ESPO) pipeline, which was opened last December, was boosting competition between Russian and Middle East suppliers, analysts said.

"More people are buying ESPO [crude] because it's very handy and it's very near, only two or three days," Osamu Fujisawa, an independent oil economist in Tokyo, told Bloomberg. "You have to consider ESPO a competitive crude to Arabian oil." Lower transport costs give the Russian oil a price advantage over Gulf crudes. The ESPO blend costs Asian customers about $1 per barrel less than Dubai crude, Bloomberg has calculated. It also contains less sulphur than Middle East crudes, which means lower refining costs.

Russia unexpectedly emerged last year as the world's biggest oil producer and exporter, surpassing Saudi Arabia on both counts. It pumped crude at a record pace averaging more than 10 million bpd during the year, compared with 9.7 million bpd for the OPEC kingpin. Early this year, analysts forecast that Russian crude output would continue to rise as new fields in eastern Siberia compensated for production declines from mature fields further west.

More Russian crude would be shipped eastwards, they predicted, driven partly by Moscow's policies aimed at lessening the country's dependence on the stagnant European energy market. "This is a strategic project because it allows us to enter completely new, growing, promising markets of the Asia-Pacific region," Vladimir Putin, the Russian prime minister, said at ESPO's inauguration in December. The first 2,694km section of the pipeline links Taishet in eastern Siberia with Skovorodino in Russia's Amur region. The project's first phase also included the construction of the Kozmino oil port on Russia's Pacific coast, which receives oil deliveries from Skovorodino by rail to be loaded into tankers. Eventually, the main pipeline will be extended to the port, while a branch to northern China is also planned.

Transneft, the Russian oil pipeline monopoly, and the state-controlled China National Petroleum Company signed an agreement in 2008 on construction of the 67km branch line. It will carry up to 300,000 bpd per day of oil when it becomes operational. Despite the new pipeline, Russia still has a long way to go to catch up with Middle East exports to the Asia-Pacific region. Last year, 11.3 million bpd of Middle Eastern oil reached that market, against 1.1 million bpd from the former Soviet Union.

Moreover, Gulf exporters are fighting hard to bolster relations with their most important oil customers. One strategy employed by the UAE and Saudi Arabia has been to put millions of barrels of crude into storage in Japan and South Korea as the basis for regional oil marketing operations. Saudi Arabia and Kuwait are in joint ventures to build oil refineries in China, configured to process Gulf crudes.

Russia, meanwhile, has done little to mend its rocky relationship with European energy importers, putting further pressure on Moscow to its expand eastbound exports. Last month, it briefly cut gas supplies to the eastern European transit state Belarus over a price dispute, jeopardising gas flows to the EU.