Florence Tan and Chen Aizhu

SINGAPORE, (Reuters) – China is slowly increasing its purchases of Russian oil at low prices. According to oil traders and shipping data, this fills the gap left after Western buyers pulled out of business dealings with Russia following February’s invasion of Ukraine.

This move comes one month after the largest oil importer in the world cut down on Russian supply. It was afraid of openly supporting Moscow, and could expose its oil giants state to possible sanctions.

Vortexa Analytics estimates that China will import a staggering 1.1 Million barrels (bpd). This is an increase of 750,000 bpd during the first quarter. It also represents 800,000 BPD by 2021.

Unipec is the trading arm for Asia’s largest refiner Sinopec Corp (NYSE:) Corp. The purchases are being led by Zhenhua Oil, a unit from China’s defense conglomerate Norinco. According to shipping data and a report from a shipbroker, Reuters, five traders, and Unipec. According to traders, Livna Shipping Ltd is a Hong Kong-registered company that has emerged recently as an important shipper for Russian oil in China.

Sinopec did not respond to requests for comment. Zhenhua, Livna and Liu were unable to respond to our requests.

These firms will fill the gap left by Western buyers following Russia’s invasion in Ukraine. Russia called it a “specially military operation”.

Soon after the invasion began, Britain, America and other important oil buyers stopped imports from Russia. Further sanctions are being considered by the European Union. This includes an embargo on Russian oil purchases. Fearing that they might be subject to sanctions, many European refiners stopped purchasing oil from Russia.

Vitol and Trafigura were two of the largest commodity traders in the world. They stopped purchasing from Rosneft (Russia’s largest oil producer), ahead of the EU rule, which was implemented on May 15, that prohibits purchases except “strictly necessary” for the EU’s energy security.

According to Reuters, a Chinese trader said, “The situation started taking a severe turn after Trafigura and Vitol left.”

The low price of Russia’s oil – spot differentials are about $29 less per barrel compared with before the invasion, according to traders – is a boon for China’s refiners as they face shrinking margins in a slowing economy. It is far below the price of similar barrels coming from Europe, Africa, the Middle East and the United States.

China receives 800,000. bpd each of Russian oil through pipelines as part of government agreements. This would increase China’s May oil imports by nearly two million barrels per day, or 15% of its total demand. Russia’s oil sales help to offset the economic damage from its sanctions.

STATE BUYERS

State-owned Chinese companies, led by Sinopec and Zhenhua, are set to buy two thirds of Russia’s flagship Far Eastern export grade ESPO (Eastern Siberia–Pacific Ocean oil pipeline) blend in May, up from a third before the invasion of Ukraine, traders who closely monitor the flows told Reuters. Russia exported approximately 24 million barrels of oil in May. This is 6% more than April.

Three traders stated that Sinopec is expected to purchase at least 10 ESPO shipments alone in May. This would double its volume prior to the invasion. Some of these trades reached a record $20 a barrel discount below the benchmark Dubai crude oil on FOB Kozmino basis.

Sinopec and Zhenhua, as well as Livna, are moving oil more from Russia’s Baltic Sea ports northwestern Europe and the Far East export hub Kozmino.

According to traders who are familiar with the subject and shipping data, Zhenhua is the state-owned Chinese oil trading company that chartered vessels to transport Russian oil. North Petroleum International Co., a Zhenhua subsidiary, received two ESPO shipments and two Urals cargoes from Baltic Sea port Ust-Luga between April and May.

Norinco was one of the most powerful defense contractors worldwide. It gained a concession in 1990 to oil-produce in Iraq. Zhenhua is a trading company that recently expanded into trading and investment in natural gas terminals.

Zhenhua purchased some Russian oil through Paramount Energy in Switzerland. Paramount Energy is a broker that sells oil directly from Kazakhstan and Russian producers. Two traders who are familiar with the matter said Zhenhua had made this purchase.

Paramount Energy has been a regular marketer for ESPO in China’s independent refiners, since 2016. In 2020 it opened a Beijing office.

Paramount Energy, in response to Reuters questions, said that it did not discuss trades after Russia’s invasion. Paramount Energy stated that it has customers in China to deliver ESPO crude cargoes under long-term agreements established before February 24, the date of Russia’s invasion. This crude oil is only supplied by non-state and independent oil producers. It has been this way for a long time.

Livna is a new player who has been a key participant in bringing Russian oil to Asia. According to Vortexa ship-tracking data and Refinitiv, Livna loaded 7,000,000 barrels of Russian Urals crude and ESPO crude for China from late April.

According to shipping data, Livna was previously a frequent shipper of Russia’s Europe-focused export grade Urals inside Europe. In early 2020 Livna began sending Russian oil to Shandong, China’s independent refiners hub.

Livna, which has so far loaded eight cargoes (or nearly 6 million barrels) of ESPO oils destined for China in May, have increased from the one to two cargoes per month this year according to shipping data. According to traders, Livna loaded two Urals shipments into Baltic ports for shipment to China in May.

Reuters was told by traders that the withdrawal of west traders attracted Shandong Port International Trade Group as a new player. This is a province-backed trader who has been able to compete with western players.