Russia Energy Pivot to China; Implications for Iran

Russia oil routes to West & East; overview

• About half of Russia's 4.5 mbpd of oil is exported by pipeline through the three main routes Druzhba (Europe), ESPO (China), and Atasu-Alashankou (China); The Druzhba pipeline exports around 1 mbpd, and the ESPO pipeline exports around 0.7 mbpd.
• The second route to China is through Kazakhstan with a capacity of 0.2 mbpd, which has transported between 0.14 – 0.2 mbpd in the last 7 years.
• The key questions in the global oil market is "the possibility of replacing current Russian exports to Europe with the Asian pipelines."

Both alternatives are at maximum capacity!

• ESPO initially operated at a capacity of 0.3 mbpd under a 20-year contract from 2012 and delivered oil to state-owned refineries (CNPC) and independent refineries (teapots). from 2018 CNPC built a parallel route and eventually bringing the total capacity to about 0.7 mbpd.
• In 2021, the Chinese refineries imported 1.9 mbpd from Russia that half of which came from ESPO; Chinese refineries mainly consume 15% to 50% of ESPO grade, so there is no Chinese refinery that process 100% of Russian oil.
• In recent months, both export pipelines have reached their maximum capacity (0.9 mbpd). Also, Russia's oil storages have a capacity of 96 million barrels, which has been at its maximum capacity in recent weeks.

Possibility of replacing Russian gas exports to Europe with China

• The volume of gas exported to Europe in 2021 was 160-200 bcm, which is not comparable to the export of 10 bcm to China through the Power of Siberia (PoS); The pipeline that will be operational in 2019 and will have a capacity of up to 38 bcm.
• It will not be possible to replace total gas exports to Europe with China (Asia) in the short term, and if PoS capacity is maximized and part of Russia's LNG export capacity reroutes to China, it will eventually increase to 80 bcm that will be equivalent to half of the exports to Europe!
• In the medium term, the completion of two LNG export projects of up to 40 bcm can increase export capacity. Connecting the Chinese pipeline to the massive West Siberia fields (which currently supply the bulk of exports to Europe) is also the most strategic move that will be possible in the long term.

A big challenge; The gas export price to China is one third of Europe!

• In addition to the issue of exportable volume, gas prices will be another challenge. Over the past two years, gas imported from Russia at 0.15 $/m3 has been the cheapest gas China has received, even cheaper than Turkmenistan. In the same period, the price of Russian exports to Europe was around 0.45 $/m3!
• The next challenge is China's relatively low reliance on gas imports in general and pipelines in particular, with the country receiving less than 15% of its gas needs in recent years through the pipeline and has a diversification policy into import options.

Russia's strategy change; Threat to Iran's export markets

• Russia's two main challenges in terms of oil exports are:1- Inadequate storage system, 2- Current pipeline capacity to China is at its maximum level.

As a result, the oil produced must reach its destinations via whatever means available, albeit at a discount of up to 30%! This discount trend in Russian crude oil, together with the features of Russia's oil, which are similar to Iran's oil, will be a serious warning signal for Iran's oil exports, particularly in the Chinese market.

also:

In terms of gas exports, with persistent gas imbalances in Iran and frequent export suspensions, shift in Russian strategy (from Europe to Asia) could come at the cost of taking over Iran's current export markets (Turkey and Iraq).?