Russia: No Plans 'So Far' To Raise ESPO Crude Oil Supply to China

China is seeking to increase crude oil imports from Russia above the 300,000 b/d it receives via the East Siberia-Pacific Ocean pipeline, but Moscow has no plans "so far" to boost its flows of the blend to its neighbor, an official with Russia's Transneft pipeline operator said Wednesday.

"There are requests [by China to increase ESPO supplies] but there are no plans to redirect the blend flows or send additional volumes to China," Transneft Vice-President Mikhail Barkov said in Russia's far eastern city of Khabarovsk, Russia's RIA Novosti news agency reported.

But Barkov added that it would be possible to do so "if there is a political decision."

The spokesman for Prime Minister Vladimir Putin, Dmitry Peskov, when contacted by Platts said he is "unaware of such talks on a governmental level."

Transneft spokesman Igor Dyomin said that China has been asking to increase volumes since Russia in 2010 launched the ESPO pipeline designed to send East Siberian crude to the Asia-Pacific region.

"They want to at least double crude purchases [from 300,000 b/d now] but have also said that they are ready to take all the volumes," Dyomin told Platts.

Rosneft and TNK-BP, the key suppliers of ESPO crude, declined to comment.

Russia launched the first 600,000 b/d phase of the ESPO line, which links oil fields near Taishet in East Siberia with Skovorodino in Russia's Far East, near the border with China, in late December 2009.

From Skovorodino, 300,000 b/d are transported by rail to the new export terminal at Kozmino on the Pacific coast. Kozmino cargoes are being sold mainly via tenders on the spot market.

The remaining 300,000 b/d are sent to China via an offshoot pipeline from Skovorodino, under a 20-year contract between Rosneft, Transneft and China National Petroleum Corporation.

The second stage of the ESPO route, which includes the extension of the pipeline to the export terminal of Kozmino and also expansion of its capacity to 1 million b/d, is to be completed in late 2012, two years ahead of the initial deadline set for 2014.

ESPO PRICE

Russia is unlikely to agree on a significant increase in crude supplies to China as it is seeking to diversify its markets and avoid dependence on a single crude purchaser in the region, said Valery Nesterov, an analyst with Troika-Dialog investment bank.

Spot trading of ESPO to the Asia-Pacific region proved to be successful, with the ESPO crude blend trading at a premium to Asian benchmark Dubai, Nesterov said.

"It would be counter-productive to supply the blend to just one country," he said.

Nesterov added that Russia and China had initially considered an option to increase supplies of Russian crude up to 600,000 b/d but exploration work in East Siberia has been "not very impressive" in confirming the possibility of getting "excessive" crude volumes in the region.

Constantine Cherepanov from UBS, however, doesn't rule out the possibility of a sharp increase in ESPO blend supplies to China if the two countries agree on a competitive price.

"Russia will always be able to re-direct supplies to other markets if it finds crude deliveries to China are no longer of interest," he said.

Russia, however, has already had a price conflict with China National Petroleum Corp. early last year, when CNPC unilaterally started paying below the agreed contract price, claiming the price formula should have included a lower transportation coefficient than in the contract.

In recent months, ESPO is being traded at a premium of around $5-6/b to the Dubai grade, while initially spot cargoes were traded at a discount to the Asian benchmark, according to Platts assessments.

ESPO exports via Kozmino totaled 15.199 million mt (312,310 b/d on average) in 2011, down 0.6% year-on-year.

The US became the biggest buyer of ESPO in 2011, having bought 27% of total ESPO sales in the period, the Kozmino port authority said in January.

The US was increasing purchases on a monthly basis through the first half of the year and they hit a record 31% or 400,000 mt in June, Platts has previously reported.

Japan, which was the biggest ESPO crude importer in 2010 and in the first quarter of 2011, bought 19% of total ESPO exports last year, followed by China (18%), South Korea (13%), the Philippines (9%), Thailand (7%), Singapore (4%), Peru (1%), Indonesia (1%) and India (1%).

Peru bought two cargoes in 2011, thus expanding the geographic boundaries of ESPO exports to South America, the authority said at the time.