November 2017

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Global: Russia’s plan to dominate fuel supply to Asia

Russia hopes to become a major supplier of gasoline, diesel fuel and other oil products to the Asia-Pacific region during the next several years, with help from the planned launch of large-scale refineries in the Far East that will be built with the participation of Asian investors.

Gerden, E., Contributing Writer

Russia hopes to become a major supplier of gasoline, diesel fuel and other oil products to the Asia-Pacific region during the next several years, with help from the planned launch of large-scale refineries in the Far East that will be built with the participation of Asian investors.

To date, such plans have been announced by Japan, where the government has recently decided to suspend the construction of new refineries due to environmental concerns. Japan has a shortage of refining capacity, due to the closure of many plants during the 1990s and the subsequent suspension of newbuild refinery construction.

A marked decline in oil production, mostly offshore, is another reason for Japan’s diminishing refining capacity. The Japanese Ministry of Ecology believes that oil reserves are unlikely to increase, as the majority of the country’s largest fields are rapidly maturing, which will require Japan to continue to rely on oil product imports.

A Russian refinery for Japan

The construction of a new, $2.5-B refinery in Russia could be beneficial to Japan, as it will ensure regular supplies of oil products to Honshu, the country’s largest and most populous island, and will not carry significant environmental risks for the island’s ecosystem. The plant will specialize in the production of fuel oil and other products. Supplies will be delivered by ferry transport between Niigata and Vladivostok
under a plan proposed by the two governments (
Fig. 1).

FIG. 1. A ferry loaded with oil products offshore Vladivostok, on the southern coast of Primorsky Krai, Russia.
FIG. 1. A ferry loaded with oil products offshore Vladivostok, on the southern coast of Primorsky Krai, Russia.

Crude oil for the new facility is expected to be provided by leading Russian oil producers, including Rosneft. The Japanese government is reportedly interested in the implementation of the project, despite the fact that Russian oil prices will likely be 1.5 times higher than the price of oil exported to Russia.

In addition to ensuring its energy security, Japan hopes to prevent strengthening cooperation between Russia and China in the field of energy. The planned refinery construction may convince the Russian government that cooperation with Japan will be more beneficial for Russia than cooperation with China, according to Valery Kistanov, head of the Center for Japanese Studies at the Institute of the Far East of the Russian Academy of Sciences.

A similar position is shared by Sergey Kruglov, a senior expert at the Russian Institute for Energy Strategy. Mr. Kruglov commented, “Even in the case of 100% funding from [Japan’s] own reserves, it will be more profitable for Japan to build a refinery on the Russian coast instead of on its own territory. This is mainly due to ecological issues and the problem of overpopulation in the country, which has become very pressing for the Japanese government in recent years. The beginning of regular supplies of oil products from Russia will allow Japan to reduce its energy dependence from the Middle East, exports that now account for about 80% of the country’s overall structure of imports.”

Mr. Kruglov also believes that the project will be beneficial for Russia, as it will allow the country to diversify its customer base. In recent years, China has become a major buyer of Russian oil, with purchases being carried out at very low prices. Among the potential investors in the new project are leading Japanese energy producers, such as JX Nippon Oil & Energy Co., Idemitsu Kosan Co. and Showa Shell Sekiyu Co.

Some in the Japanese Ministry of Economy, Trade and Industry have expressed skepticism toward the project. According to the Ministry, Japan’s demand for oil products will decline during the next several years due to the planned, wide-scale introduction of hybrid and electric cars. According to these predictions, demand for gasoline and diesel will decline by 1.3%/yr by 2020. However, much will also depend on the forthcoming winters. Japan’s cold winters in recent years have forced local refineries to significantly increase their production, especially of kerosine, which is used as heating fuel in Japan. Sales of kerosine in Japan grew by 43% in 2016, compared to 2015.

China eyes Russian refining real estate

Japan is not the only country interested in funding the construction of a refinery within the territory of the Russian Far East. China has also expressed an interest in the establishment of refining capacities in Russia.

FIG. 2. Preparations for the construction a refinery within the Lesozavodsky urban district of Russia’s Primorye region.
FIG. 2. Preparations for the construction a refinery within the Lesozavodsky urban district of Russia’s Primorye region.

Earlier this year, XinChen Ind. & Com. Group announced its intention to invest up to 30-B CNY ($4.4 B) in the construction of a refinery in the Primorye region of Russia. Zhai Yuzia, head of XinChen, said the refinery could be built within the territory of the Lesozavodsky urban district of the Primorye region. It would have a capacity of 5.5 MMtpy–6 MMtpy, depending on its depth. The project could be jointly implemented by XinChen and Russian Rosneft or Sibur. Site preparations for the implementation of the project have already started (Fig. 2).

At present, the Chinese refining industry lacks competition. The majority of China’s refining capacity is run by two large, state-owned enterprises, PetroChina and Sinopec, which collectively account for 72% of total refining capacity. The remaining refining capacity is controlled by independent regional companies that operate smaller, less complex refineries.

The majority of the new refinery’s production would be sent to China and other Asia-Pacific countries. Russia will not need any of the supply, as its domestic demand is met by its refineries in Komsomolsk and Khabarovsk. China’s demand is predicted to grow gradually in the coming years. According to the Chinese Ministry of Economy, the country’s demand for diesel will grow from 0.3% in 2017 to 0.5% in 2018, as its economy continues to recover.

Potential elsewhere in Asia-Pacific

Demand growth is forecast to increase in other countries in the region. South Korea is anticipated to consume 80 MMbbl of gasoline this year, up 1.4% from 78.9 MMbbl in 2016, according to a report by the Korea Energy Economics Institute. South Korea’s jet fuel demand is expected to rise 2.2% to 37.8 MMbbl in 2017, compared with 37 MMbbl in 2016. Production of diesel and jet fuel from Russian Far East refineries could come into high demand in South Korea.

In the meantime, it is possible that Vietnam will become another major consumer of Russian oil products. In recent years, the country has faced problems during the expansion of its refining capacities due to declining domestic crude oil production. At present, the country is a net exporter of crude oil and a net importer of finished oil products; however, Vietnam’s oil consumption has increased by more than 70%, from 238.4 Mbpd in 2004 to 613 Mbpd in 2016. HP

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