Winners And Losers Of Crude Oil Import Boom

BMI View: We take a look at China's oil import mix, in light of expectations for a continued increase in Chinese crude oil import requirement in the coming decade. T he Chinese oil import market remains dominated by crude sourced from the Middle East and North Africa , which has not changed despite western sanctions on Iranian crude exports. Sub-Saharan Africa's share of Chinese crude imports may have fallen mainly because of Sudanese outages, but Angola, the Democratic Republic of Congo and new producer Ghana have seen their exports to China rise. Russian and Kazakh deals with China will also see an increase in exports f rom these countries, though we note that Russia n oil flows to China would most likely come at an expense to the supplier ' s traditional importers. Buttressed by oil-for-loans deals, Venezuela will also continue to be an important source of imports for China, barring any disruptions to the country's crude production.

China's growing economy has seen its oil consumption nearly double between 2002 and 2012, from 5.16mn barrels per day (b/d) to 10.15mn b/d according to the US Energy Information Administration. Accompanying this demand boom has been a rapid expansion of the country's refining capacity, which has increased by about 90% over the same period. This expansion has supported an increase in Chinese crude oil demand to meet its downstream segment's feedstock needs.

Chinese Boom
% Year-on-Year Change In Chinese Oil Consumption, Production & Refining Capacity, 2002-2013

China is the world's fourth largest oil producer and its upstream output has been making steady gains. As a result of investments particularly into brownfield and offshore projects, led by national oil companies (NOC) PetroChina, Sinopec and China National Offshore Oil Corporation (CNC), total crude oil and liquids production (excluding refinery gains) have risen 22% in the past decade from 3.40mn b/d in 2002 to 4.17mn b/d in 2012. Nonetheless, Chinese refining expansion and demand growth have far outstripped the increase in domestic crude oil production. Together with a deliberate policy to build up the country's strategic petroleum reserves since 2008, China's crude oil imports have steadily risen over the years.

Crude Requirement
China's Crude Oil Imports, 2009-2012 ('000b/d)

Despite our expectations for moderation in Chinese oil consumption growth as economic expansion slows, continued additions to refining capacity - from our estimate of 10.4mn b/d in 2012 to a projection of 13.6mn b/d based on planned and proposed projects - will likely keep Chinese demand for crude oil elevated through our forecast period. However, the maturity of China's major oilfields, particularly PetroChina's flagship Daqing and Sinopec's Shengli, will eventually cap the production gains that enhanced oil recovery (EOR) measures currently being carried out in these fields can bring about. This underpins our forecast for China's total liquids production (excluding refinery gains) to stagnate at levels between 3.8mn and 4.2mn b/d through our forecast period. Therefore, we expect China's crude oil import requirement to continue to rise in tandem with its refining needs as downstream players increasingly eye the fuels export market for gains.

No Stopping Import Growth
China Oil Production & Refining Capacity, 2013-2022 ('000b/d)

This means that the Chinese crude oil market will remain an important one for the world's upstream producers, especially in light of the US' oil production boom that has seen a slowdown in the latter's oil import requirement. In 2012, total crude oil imports averaged at about 5.44mn b/d, a 7% year-on-year increase from 2011. Between January and April 2013, this average has risen to 5.62mn b/d.

Crude Oil Partners

  • Saudi Arabia continues to be China's top source of foreign oil, accounting for about 20% of its total imports in 2012. Angola is the second largest source, exporting about 806,430b/d to China in 2012;

  • While they respectively remain China's third and eighth largest source of crude oil, Russia and Kazakhstan has seen their share of Chinese oil imports grew by a bout 1% between 2009 and 2012;

  • Sanctions on Iran have seen Iranian crude fall from 11% of China's total imports in 2009 to 8% in 2012. Another big loser is Sudan. Following the partition into Sudan and South Sudan and the export halt political tensions brought about, its share of the Chinese import market has fallen from 6% in 2009 to 1% in 2012;

  • The biggest beneficiaries of a fall in Iranian crude demand appears to Iraq, which share of Chinese imports rose from 4% in 2009 to 6% in 2012, and Venezuela, which enjoyed a 6% share of the Chinese crude import market in 2012 compared to 2% in 2009.

Oiling The Chinese Machine
Sources Of Chinese Oil Imports (%), 2009 (RHS) and 2012 (LHS)

Middle East

F rom a regional perspective, the Middle East remains China's largest source of crude oil imports, accounting for nearly half of the total in 2012. If North Africa is included, the Middle East and North African (MENA) region is undeniably China's most important crude oil import partner. With the exception of Iran, all countries in MENA saw an increase in Chinese imports of their crude between 2009 and 2012.

Interestingly, Libyan exports to China have only suffered briefly from its 2011 Civil War. Chinese imports from Libya quickly rebounded from a low of 52,050b/d in 2011 to 146,740b/d in 2012 - a 15% increase from 2009 levels. A ramp in Iraqi production will continue to support the country's oil exports to China, which has been given access to crude output from fields such as Rumaila and Halfaya as a result of China National Petroleum Corporation (CNPC)'s participation in these giant fields' development. In fact, in the first four months of 2013 alone China has imported an average of 461,960b/d of Iraqi crude, up 47% from its 2012 average.

MENA: Maintaining Dominance Of Chinese Import Market
Crude Oil Imports To China By Region, 2009-Year-To-Date ('000b/d)

Sub-Saharan Africa

This is followed by the Sub-Saharan (SSA) Africa region, though its share of the Chinese market has fallen from about 26% in 2009 to 20% in 2012. The 79% drop in Sudanese supply is the principal cause of this decrease, though Nigerian oil exports to China has declined 32.7% from about 27,980b/d in 2009 to 18,810b/d in 2012.

However, other SSA countries have taken up some of this slack. Angolan exports to China have risen nearly 20% over the same period, while the Democratic Republic of Congo raised its exports from zero in 2009 to 17,170b/d in 2012. Emergent oil producer Ghana has also taken a stake in the Chinese market since the first flow oil in 2011.

Loss Of Sudanese Crude Sends Region's Exports Lower
Sub-Saharan Africa Crude Oil Exports To China, 2009-2012 ('000b/d)

Central and Eastern Europe (CEE)

CEE - or predominantly Russia and Kazakhstan - take up about 13% of Chinese oil imports in 2012, a 3% increase from 2009. The increase in Russian oil exports to China has been facilitated by the co nstruction of the East Siberian- Pacific Ocean (ESPO) pipeline and an offshoot linking Russian oil into mainland China in 2010. Going forward, an agreement between Russian NOC Rosneft and China CNPC to send more Russian crude into China in a second oil-for-loan deal will see Russian exports to China continue to grow ( see 'Moving Closer To The East', March 26 ) . Kazakh supplies to China are likely to increase in the future for the same reason ( see 'Significant Output To Flow East', March 15 ).

The rise in Russian exports to China will have a bigger impact on traditional importers of Russian oil than for players competing for a share in China's oil market. Chinese demand expansion could continue to support growing supplies, but limited growth prospects for Russian crude oil production suggest that exports elsewhere, particularly to Europe, would be squeezed in order to direct larger volumes to China.

Eastern Flows Close In On Traditional Importers
Russian Oil Production & Net Exports, 2013-2022 ('000b/d)

South America

However, the region that has been making the largest strides into the Chinese oil market has been South America. From 5.9% in 2009, South America made up 9.7% of Chinese crude imports in 2012. As noted, Venezuelan exports to China have grown nearly four times between 2009 and 2012. Colombia has also doubled its crude supplies to China over the same period. Oil-for-loan deals with Venezuela, together with a proposed refinery project between Venezuelan NOC PdVSA and CNPC in southern China should also help maintain the level of exports to China, barring unforeseen drops in Venezuelan crude production.

Oil-For-Loans Props Up Venezuelan Exports
South America Crude Oil Exports To China, 2009-2012 ('000b/d)

Brazil also saw its exports to China double between 2009 and 2010 to 161,620b/d in 2010, but this has since fallen to more modest levels of about 121,910b/d in 2012. This is a reflection of the country's interim production problems. Despite our forecasts for an increase in Brazilian crude production, the South American giant's own consumption growth, particularly with planned refinery projects, should limit its export capacity to China in the short-term.

This article is tagged to:
Sector: Country Risk, Oil & Gas
Geography: China, Angola, Iraq, Iran, Kazakhstan, Russia, Sudan, Venezuela

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