The Chinese market is a top prize in the oil industry, and for months a buzz has spread that Russia is poised to overtake Saudi Arabia as China’s top supplier. This could both increase Russia’s economic power and decrease Saudi Arabia’s leverage in the global oil market. However, there are significant reasons to be skeptical that such a scenario is underway.
The trend in import data actually indicates that Russia is not replacing Saudi Arabia as China’s primary source of crude oil. In fact, Saudi Arabia is actually well-positioned in the Chinese oil market to meet China’s crude oil demand for the long term.
The monthly data from 2015 indicate sustained levels of Saudi crude oil exports to China; whereas Russian exports were much more variable (see “Supplying China”). In the eight months that Saudi exports topped Russian exports, they did so by an average of 27%. Meanwhile, Russian exports only beat Saudi exports by an average of 8%. These data reveal even less of a Russian foothold in the Chinese market when the month of May is taken out. In May, Saudi-owned refineries in China were closed for maintenance, accounting for most of the drop in Saudi exports. Excepting May, for the three months when Russian exports topped Saudi exports, Russia barely overtook Saudi Arabia by 5%.
A casual look at the numbers seems to indicate that Russia is slowly closing its gap with Saudi Arabia, but before jumping to conclusions, it is important to remember the following points:
Saudi Arabia has long-term contracts with China that guarantee a baseline of petroleum purchases. Sinopec (SNP) already has agreed to purchase at least one million barrels of oil a day from Aramco in 2016 – a number that has remained constant since 2014. If China’s demand for oil finally begins to drop in 2016, Saudi Arabia will have a guaranteed market share.
Saudi Arabia currently owns stakes in the Fujian Refining and Petrochemical Company and the Fujian Petroleum Co. Ltd., both located in China. Aramco has been engaged in high-level negotiations with CNPC and Sinopec to purchase stakes in additional Chinese refineries. China is likewise investing in Saudi refineries. A primary reason Saudi Arabia purchases stakes in refineries is to ensure that its oil is used in those refineries.
China has been importing oil at higher rates each month, despite reports of declining industrial growth. The evidence indicates that the Chinese are stockpiling oil in a fashion similar to the United States’ strategic petroleum reserve. When China’s reserve is full, its oil imports will likely decrease from current highs. Because China has a history of reliable dealings with Saudi Arabia — and less reliable dealings with Russia — the decrease is more likely to come out of the Russian end.
Finally, it is questionable whether Russia can sustain its current high levels of production. Russian oil operations, unlike Saudi operations, are less sophisticated and less well-managed. Russian oil production recently reached a post-Soviet high of 10 million barrels per day, but several of Russia’s key oil fields in Western Siberia and European Russia are showing signs of decline. New sources have been discovered, but are likely too expensive to exploit given the drop in oil prices.
On the other hand, Russia does have two advantages: The opening of the Eastern Siberia-Pacific Ocean (ESPO) pipeline between Russia and China; and in July, Russia agreed to accept China’s renminbi as payment for oil rather than the dollar. Currently, Saudi Arabia only accepts dollars as payment for oil. This could be a significant driver for the Chinese to favor Russian oil over Middle-Eastern oil. Whether this will be enough to bite into Saudi Arabia’s share of the Chinese market remains to be seen.