New US sanctions on Rosneft and Lukoil, Russia’s two biggest oil producers, have caused upheaval for buyers in China and India, the two largest markets for Russian crude. Since the sanctions were announced last week, officials in China and India have tried to strike a balance between asserting their sovereignty in the face of unilateral US action and ensuring their commercial interests are not compromised by noncompliance. For now, buyers in both countries are reducing their purchases of Russian crude while waiting for workarounds to emerge. China and India are the top two buyers of Russian crude. China imported 1.78 million barrels per day from Russia in the first nine months of this year, according to Chinese customs data, while Indian imports of Russian crude averaged 1.73 million b/d through September this year, according to tanker tracker Kpler. Russian East Siberia-Pacific Ocean (Espo) crude makes up most of China’s imports from Russia, including more than 600,000 b/d that flows directly to China via pipeline; another 1 million b/d or so of Espo arrives by tanker. India is the largest buyer of seaborne Russian crude, more than 70% of which is Urals.
China has long maintained that it is not beholden to unilateral sanctions that are not backed by the UN. Still, in the wake of the latest US measures against Rosneft and Lukoil, Chinese national oil companies (NOCs) have suspended taking deliveries of in-transit Russian crude that originated from either of the blacklisted Russian firms, according to a Chinese market source and a China-focused analyst. The suspension applies even to cargoes due to arrive before Nov. 21, when a wind-down period ends that Washington has offered before deliveries would be subject to the sanctions. The NOCs’ compliance departments are working to determine if they will be able to accept the cargoes but have not yet been able to reach a decision, the sources said. The suspension will remain in place until they can arrive at a definitive conclusion, the analyst said. Going through middlemen may be an option, but sources warned that banks will decline to handle any financial transactions associated with cargoes that show either Rosneft or Lukoil on the bills of lading.
India, which is more tied to the West financially and diplomatically, takes a more nuanced public view of sanctions but has generally tried not to run afoul of US measures. As such, Indian refiners have now mostly suspended purchases of Russian crude but are seeking ways to import barrels from nonsanctioned companies. If successful, they could resume Russian purchases by early November. A senior government official says Rosneft, Lukoil and previously sanctioned Surgutneftegaz together supplied more than three-quarters of crude exports to India. MRPL, a unit of state-run explorer ONGC, has paused purchases of Russian oil until it can gain more clarity over the new sanctions, a senior executive said. The company has put out a tender for 1 million-2 million b/d of nonsanctioned spot cargoes, but has yet to receive any offers for Russian crude, sources say. Assuming Indian refiners can work around the sanctions, any upcoming purchases of Russian crude would be for December delivery. The current suspension means Russian imports arriving in December could plunge by 50%-75% compared to this year’s average, said an Indian refining official. Bharat Petroleum, Indian Oil and HMEL are the biggest state buyers of Russian oil, although Bharat has more than halved its purchases in October from a year ago to just over 100,000 b/d. Indian Oil more than doubled its purchases this month from September, to 400,000 b/d, but has now paused buying; the company says it is prepared to buy nonsanctioned Russian cargoes. Private refiner Reliance Industries has cut monthly imports of Russian crude by around 200,000 b/d to a little over 500,000 b/d, according to ship-tracking data. It may declare force majeure for any Rosneft supplies due to arrive after Nov. 21 under the 500,000 b/d term contract the duo signed this year, which could leave Reliance some 20 million bbls short of Urals through year-end and force it to source higher-cost volumes from the Mideast. Banks are scrutinizing Russian oil shipments, seeking details about the source for every cargo, said a senior refining executive.
Most players in China and India are taking a wait-and-see approach as they assess options and look for work-arounds. Because Russian crude isn’t itself sanctioned, market watchers expect buyers eventually to find alternatives that keep Russian barrels flowing. Smaller Chinese independents are likely to keep buying crude originating from Rosneft or Lukoil, although they have grown more cautious, market sources say. Chinese independent Yulong Petrochemical, for instance, which owns a 400,000 b/d plant in Shandong, is set to double its intake from Russia in November, according to industry sources. One potential sanctions work-around, according to a China-focused analyst, could see Rosneft or Lukoil temporarily transfer ownership of their crude volumes to a nonsanctioned Russian entity and then set up shell companies to handle future production. Some Indian refining executives have also suggested that Rosneft may have to change the ownership of its fields to enable the continued flow of supplies to India.