Publication: Eurasia Daily Monitor Volume: 3 Issue: 144

Russian boosted its oil exports to China by rail this year, but crude shipments are yet to match earlier expectations. In the first six months of 2006, Russian crude shipments to China by rail reached some 100,000 barrels per day (nearly 5 million tons) or up 31.4% over last year, according to the East Siberian Railway, a subsidiary of Russia’s state-owned Russian Railways Company (RZD).

Nearly four million tons of oil crossed the border at Zabaykalsk-Manzhouli, while the remaining amount was funneled through Naushki at the Russian-Mongolian border, according to the East Siberian Railway. Supplies by Rosneft through Zabaykalsk were up, while shipments by Yukos via Naushki were decreasing. RZD prioritizes crude exports to China, East Siberian Railway officials said, adding it was still aiming at funneling some 240,000 b/d (12 million tons) this year (Itar-Tass, July 17).

Russia has long promised to boost oil exports to China by rail. In late 2005, RZD pledged to raise Russia’s oil exports to China by rail up to about 300,000 b/d (15 million tons) by 2006. The RZD has said it was technically feasible to boost rail shipments to China to 600,000 b/d (more than 30 million tons) eventually.

Russia’s RZD nearly doubled rail crude oil exports to 113,000 b/d (5.67 million tons) in 2004, up from 60,000 b/d (3 million tons) in 2003. In 2005, Russia supplied 152,000 b/d (7.6 million tons) of oil to China by rail or up 34% year-on-year, including 5.2 million tons via Zabaykalsk (up 68.2%) and 2.47 million tons through Naushki (down 5.9%), according to RZD.

Therefore, crude shipments to China by the Rosneft, the Russian state-controlled oil company, tend to go up, while exports by other suppliers, notably the nearly bankrupt Yukos, go down. As a part of its deal with China, Rosneft has pledged to supply a total of 48.5 million tons of crude to China.

Rail freight is expensive, and while Rosneft remains keen to export oil to China by rail, now other Russian oil firms are understood to be reluctant to become suppliers to China due to high costs and low profit margins of the scheme.

For example, Russia’s top oil company, Lukoil, reportedly sent some test shipments of its oil to China by rail in early 2005 but found the route hardly economically feasible and cut China-bound supplies in the second half of last year due to better domestic margins. Meanwhile, Lukoil reportedly is mulling supplies of up to 2.5 million tons of crude from its projects in Kazakhstan via Atasu-Alashankou pipeline.

Russian regulators have moved to make rail freight more competitive. Since the beginning of 2006, RZD cut its freight tariffs for China-bound oil by some 17%. Nonetheless, the tariffs remain high, $59 per ton for Zabaykalsk and $39 per ton for Naushki. RZD has indicated readiness to discuss $28 per ton tariff as soon as supplies reach 40 million tons per year.

Meanwhile, the Chinese became co-owners of Rosneft when earlier this month the Russian firm went public on both the London and Moscow stock exchanges in a major IPO. China National Petroleum Corporation (CNPC), the country’s top oil company, acquired a $500 million stake in Rosneft. Based on its long-term development strategy and the results of a comprehensive evaluation, CNPC officially submitted its subscription proposal to Rosneft on July 12, the CNPC statement said. CNPC’s subscription proposal gave full consideration for supporting Rosneft’s successful listing and aimed to boost cooperation between the two companies.

“CNPC’s subscription of Rosneft shares will further expand cooperation and deepen the long-term cooperative relationship,” CNPC said in a statement. According to the bilateral agreement signed in July 2005, Rosneft and CNPC are to cooperate on the establishment of a joint venture for upstream projects in Russia and downstream ventures in China (China Daily, Xinhua, July 19).

During Russian President Vladimir Putin’s visit to China in March, Rosneft and CNPC also signed another cooperation blueprint, which involved exploration and development in Russia and refining, processing, and marketing in China. A total of 15 documents were signed as part of Putin’s state visit to China, including an agreement between CNPC and Rosneft. During Putin’s talks with President Hu Jintao, he reiterated pledges to raise oil and gas exports to China.

Apart from CNPC, Rosneft offered the chance to buy significant stakes only to BP ($1 billion) and Malaysia’s state oil company Petronas ($1.1 billion). However, CNPC managed to acquire just one-sixth of the $3 billion of Rosneft shares it had reportedly sought. It has been understood that as a part of a would-be $3 billion deal, China sought better access to Russian energy reserves as well as expansion of the existing contract for Rosneft to supply crude oil to China by rail. Moscow’s decision to allow CNPC to snag only $500 million worth of shares in Rosneft appears to indicate that Russian would prefer to avoid over-reliance on China in its East Asian oil policies.