China and India: What to Expect from the World’s Pivotal Buyers
This commentary is part of the annual Energy Futures Forum, a project from the CSIS Energy Security and Climate Change Program exploring changes to the energy and climate landscape over the next 10 years.
The EU and G7 sanctions against Russia have led to a reshuffling of flows for Russian crude oil and products. China and India have appeared as the key alternatives to European buyers for Russian crude oil. In the products market, reorganization is still ongoing, but there is a more diverse range of outlets besides China and India, such as the Middle East, Asia, Africa, and Latin America.
An end to the sanctions would see a possible easing of some of the current market’s inefficiencies but some of the recent flow changes might last.
Russian Crude Finding New Outlets to Replace European Buyers
European refiners have progressively stopped buying Russian crude oil, except for a few countries still allowed to, predominantly via the southern leg of the Druzhba pipeline. Prior to the war in 2021, 47 percent of Russian crude oil (seaborne and others) went to EU countries and the United Kingdom, with an average volume of 2.130 million barrels per day (mb/d). That volume had fallen to 834 thousand barrels per day (kb/d) by December 2022 (19 percent), of which 677 kb/d was pipeline export.
As the European market started to close, China and India stepped in, with the latter now taking over 50 percentage of all Russian seaborne crude exports, averaging just below 2 mb/d in March. Sri Lanka and Pakistan are expected to receive Russian crude but volumes for both countries will remain minimal.
In the Middle East, the UAE appeared in 2022 as a new destination for Russian crude oil, a rather unusual move for a net crude oil exporter. However, the barrels arrived in Fujairah for storage and possible resale.
In non-EU Europe, Turkey significantly increased its purchase of Russian crude oil, with the country’s intake averaging 375 kb/d during Fall 2022 (over 288k b/d versus the 2021 average). However, at the end of 2022, the Azeri national oil company, SOCAR, which operates a 214 kb/d-refinery in Turkey, decided to join the EU ban and stopped buying Russian crude oil for its Turkish refinery in December 2022. It appears to have restarted since, with Russian crude oil exports to Turkey at 160 kb/d for the first three months of 2023, split evenly between Tupras and Socar.
Russian Products Market in Flux since February 2023 Ban
For Russian products, the change in flows is more recent but already striking. In 2022, on average, 58 percent of Russian products were destined for EU countries and the United Kingdom, in particular for gasoil, motor gasoline, and naphtha. Many European nations continued to buy until the EU ban started in early February 2023.
Since February, the clean product market has shifted to Africa, the Middle East and Asia. However, it remains to be seen whether those new destinations keep taking the same volume of Russian products, especially as some areas are suspected to serve as storage for resale.
North Africa has experienced a surge in Russian products intake since December 2022. Morocco in the first three months of 2023 received on average 50 kb/d of Russian diesel, compared to a 2021 average intake of 1 kb/d and 2020 domestic diesel consumption of 104 kb/d, according to the International Energy Agency. Tunisia took 40 kb/d of Russian diesel from January to March 2023, versus a 2020 domestic demand of 35 kb/d and a 2022 average Russian gasoil intake of only 2 kb/d.
West Africa has also seen higher imports of Russian diesel and motor gasoline. In the first three months of 2023, both Nigeria and Ghana upped their intake of Russian motor gasoline from 0 kb/d in 2021 to an average of 43 kb/d and 6 kb/d respectively.
In East Africa, Asia and the Middle East, higher volumes of gasoil and motor gasoline have started to arrive from Russia. In the Middle East, both the UAE and Saudi Arabia became regular buyers of Russian products, with gasoil exports reaching 74 kb/d for the former and 133 kb/d for the latter in February, with more on the way.
Only six weeks into the EU ban on Russian products, flows and volumes remain in flux. Refinery maintenance for Russian refineries may start early, giving Russian product exporters time to assess the market.
China Consolidates Its Place as Key Russian Crude Buyer
Chinese crude demand has progressively recovered from the impact of Covid-19-related lockdowns. Imports from Organization of the Petroleum Exporting Countries and allied producers (OPEC+) countries and the U.S. Gulf Coast (USGC) averaged 8.856 mb/d in 2022 (up 500 kb/d year-over-year), with a small rise in the first two months of 2023, to 8.946 mb/d (up 90 kb/d versus 2022).
China traditionally relies on a diversity of sellers for its crude. However, Russia’s place in China’s crude supply has surged from 16 percent of total Chinese intake in 2021 to 23 percent so far in 2023. Pipeline exports via the Chinese ESPO branch keep rising thanks to improvement on the line, while seaborne imports were close to 1.5 mb/d in February 2023. Russia is currently the number 1 crude supplier to China.
Russia’s rise in Chinese crude imports was achieved predominantly at the expense of West African volumes, in particular Angolan, with their imports in 2022 down 18 percent year-on-year, to 889 kb/d, although a drop from those countries was felt prior to the Ukrainian war, due to lower supply.
Other regions have not been affected as much. Middle Eastern imports rose by 442 kb/d year-on-year in 2022, to 5.568 mb/d, with the first two months of 2023 at 5.305 mb/d, following larger intake in November and December 2022. Saudi Arabian imports remained stable year-on-year, at 1.389 mb/d (down from 39 kb/d year-over-year).
Chinese refiners also take Russian naphtha and fuel oil for feedstocks, with a surge in volume experienced since the start of the war in 2022.
India’s Emergence as the Top Russian Crude Buyer
Indian crude imports also recovered in 2022, up 10 percent year-on-year, to 4.460 mb/d.
Before the Ukrainian war, India was a very intermittent buyer of Russian crude. Since then, imports from Russia have risen from an average of 34 kb/d (less than 1 percent of total Indian imports) in 2021 to almost 600 kb/d on average in 2022 (13 percent of total imports), surging above 1.7 mb/d in February 2023 (36 percent).
At the same time, imports from key suppliers such as Iraq and Saudi Arabia remained flat (below 3 percent and over 2 percent respectively). By February 2023, Iraq and Saudi Arabia represented respectively 21 percent and 16 percent of Indian imports compared to 35 percent for Russia.
How much more Russian crude can Indian refiners process? Based on the most recent loading data, volumes will continue to climb in the coming months, with February and March Russian loadings to India above 1.7 mb/d. However, Indian refiners are mindful of keeping their options open as are some of the producers: Iraq was heard recently offering aggressive pricing to retain its market share.
Like China, Indian refiners import Russian naphtha and fuel oil for feedstocks.
Looking Ahead: A New Normal
So far, Russia managed to retain a certain diversity in buyers, albeit with a heavy reliance on two countries. Its crude exports actually rose in 2022, up 337 kb/d year-on-year, to 4.880 mb/d, and after almost two months of EU ban, even Russian product exports appear more resilient than expected.
However, several factors could impair the current status quo. For products, in the short term, it is unclear if the countries that have started buying since February will continue at the same pace of purchase, for instance in the Mediterranean.
In the medium to long term, the start of large refineries would limit market share for Russian products. These include in West Africa with the Dangote refinery; in the Middle East with the ramp-up of the Al-Zour refinery in Kuwait, Jizan at full capacity in Saudi Arabia, and the start of Duqm refinery in Oman; and in Asia with several new large refineries in China.
Several countries have increased their products exports to take over from Russia in Europe, in particular India, China and Saudi Arabia, while at the same time receiving Russian products. Russia might have to decrease product exports, freeing more crude oil barrels for the export market, if it can absorb it.
For crude oil, lower discounts for Russian barrels, due for instance to more aggressive pricing from the Middle East, could erode their competitiveness, especially if freight rates increase. At the moment, Chinese and Indian buyers seem content purchasing current high volumes of heavily discounted Russian barrels, with maybe room to take a little more.
Over time, if the conflict lasts for years, Russia will face challenges similar to those encountered by Venezuela and Iran, both under oil sanctions for a number of years. Venezuelan exports have dramatically fallen, with the infrastructure in very poor condition.
Iranian exports have continued to flow, albeit at lower levels and relying heavily on one key outlet, China. When sanctions were lifted in 2016, Iran very quickly regained market share. It took the country only six months to increase its exports by 1 mb/d and regain some lost customers.
When sanctions end, Russia could see a very prompt return of some of its European customers as Russian barrels remain the most obvious feed for many regional refineries, sometimes built to run on Urals, with transportation costs minimal.
However, refineries in Europe had started to diversify their supply before the conflict, on the back of lower Urals’ availability, especially as alternatives were more bountiful, in particular from the USGC. With European refineries getting increasingly used to run a different slate amid a changed perception of Russian supply risk, those new Russian flows would to a certain degree stay in place after the lifting of Russian oil sanctions. European refiners would rely more on what they perceived as more secure sources.
At present, China and India have become crucial for Russian crude oil exports, while a range of new countries are taking Russian products. Discounted prices have helped open those new markets, but a significant narrowing of those discount would become a deterrent.
An end of the sanctions would see a partial return to the preexisting flows if the Russian oil industry survived the current crisis. The backing of China and India, combined with OPEC+ support, seems sufficient for the moment to keep the Russian oil industry going.
Virginie Bahnik is a senior analyst at Petro-Logistics and a participant in the CSIS Energy Security and Climate Change Program’s 2023 Energy Futures Forum.
The 2023 Energy Futures Forum was made possible by support from Chevron and general support to the CSIS Energy Security and Climate Change Program.