China has increased deliveries of oil products to North Korea during the first five months of 2014 according to the latest Chinese customs data, which also confirms the widely reported halt in crude oil shipments.
However, data from the Chinese General Administration of Customs shows that the oil-products being delivered to North Korea only cover a fraction of the supplies of crude once shipped, with total deliveries falling by over 60 percent.
Experts were unsure over whether this constituted a warning from Beijing in response to North Korea’s regional provocations or whether the slow-down was due to the DPRK’s aging refineries. Crude oil must be refined into petroleum products such as fuel oil, diesel and aviation fuel before being used.
“Providing the DPRK with smaller volumes may be part of the Chinese programme to distance themselves from North Korea”
The development also comes as a growing number of Chinese refineries have come online and the country has evolved into an exporter of oil products.
“Providing the DPRK with smaller volumes may be part of the Chinese programme to distance themselves from North Korea and send the message that China is no longer prepared to be their benefactor,” Tony Regan, principal consultant at Singapore-based Tri-Zen International, told NK News.
SHIFTING TRADE
In total, China exported more than 88,000 tons of refined products to the DPRK between January and May 2014, with more than half of the growth caused by spikes in gasoline and kerosene shipments. Gasoline, is primarily used as a fuel for motor vehicles, while kerosene is used to power jet engines and as a heating fuel in North East Asia.
“[This] is somewhat over half of the recorded exports from China to the DPRK in 2010, and somewhat over a quarter of the net petroleum products imports that we estimated for the DPRK from all nations in 2010. So there may be a real shift in petroleum products exports going on,” David Von Hippel a Senior Associate at the Nautilus Institute for Security and Sustainability told NK News.
One cause of the shifting trade patterns could be technical problems at the DRPK’s Pongwha refinery, which is supplied by an oil pipeline from China and was built in 1978. North Korea’s other refinery, the Seungri chemical complex near Rason, has been shuttered since 2009.
“It’s hard to tell for sure, given variability in both shipments and reporting”
Experts warn however that it is difficult to draw firm conclusions from customs data alone.
“We are still unsure why the DPRK is importing a greater quantity of refined petroleum products from China and imports of unrefined oil seem to have stopped. One theory holds that the Pongwha Refinery is not operating. However this theory is far from conclusive,” Curtis Melvin, a researcher at the US-Korea Institute at Johns Hopkins SAIS told NK News.
“It’s hard to tell for sure, given variability in both shipments and reporting, and given the relative magnitude of shipments versus estimated demand,” Von Hippel added.
REFINED PRODUCTS
Kerosene, used as an aviation fuel, saw the sharpest spike in exports increasing by 5131% when compared to the same period last year. The North Koreans imported more than a hundred thousand barrels, mostly in one bulk shipment in March, amidst news published in early July by Reuters that the DPRK was looking to restart domestic flights.
Gasoline exports also rose by 84% to approximately 280 thousand barrels when compared to the January – May period in 2013.
DPRK imports of diesel rose to 63,000 barrels and mark the first time China has exported the petroleum product since 2011, although no data is available before this point. The exports remain at a low level however, representing only a few percent of total DPRK yearly usage.
“It is interesting to see what is not there in large quantities: diesel. North Korea used to import diesel, and I would expect demand to be greater than gasoline … Perhaps, like China, the military trucks run on gasoline rather than diesel, so the objective is to keep the military happy,” said Regan.
China also upped exports of Butane by 28%, which is used primarily as fuel gas or in gasoline blending. “[Butane] is more likely used as an input to bottled gas (for example, liquefied petroleum gas, LPG), which is, we have heard, increasingly used for cooking in urban households that can afford it in the DPRK.” Von Hippel told NK News.
“Perhaps, like China, the military trucks run on gasoline rather than diesel, so the objective is to keep the military happy”
The remainder of the exports were made up of fuel oils, liquefied petroleum gases, and what Chinese customs labels as ‘other’ – a classification group containing other forms of kerosene, diesel and fuel oil. These remained at relatively constant levels when compared to the same period in 2013.
CRUDE EXPORTS
North Korea has traditionally been dependent on its northern neighbour for the majority of its oil imports, normally receiving more than 500 thousand tons of crude a year from China. According to customs data, these shipments have been markedly absent in 2014, prompting speculation that Beijing might be distancing itself from North Korea.
“There could be several reasons why there are no recorded crude oil imports this year to date, and not all of them mean that China hasn’t actually shipped crude to the DPRK.” Von Hippel told NK News.
“Not all of them mean that China hasn’t actually shipped crude to the DPRK”
As reported by Daily NK, a Seoul based media outlet, a facility in Dandong has continued to pump oil via pipeline into the DPRK. Although no volumes are given in the piece, it is possible that the crude flowing through the Dandong pipeline is not delivered on a commercial basis but as aid.
“It could also be the case that the DPRK is importing some unrefined oil from China, however it is being legally transferred as aid, not trade. In this case the oil will not show up in Chinese trade statistics.” Melvin added.
Spikes and troughs in Chinese customs data are also common, though it is unclear if the volatility in the data is attributable to oil flows or inconsistent reporting. “Recorded shipments can vary a lot over time, so some irregularity is not out of the ordinary,” Von Hippel added.
SHORTFALL
Should the customs data be accurate however, the new flow of refined products would not keep pace with the shortfall in crude. Between January and May last year, China shipped more than 250 thousand tons of crude to the DPRK, against the 88 thousand tons of refined products so far in 2014.
“If there has been a real physical reduction in crude oil shipments to the DPRK (though reduction to zero seems implausible), yes, it could be because China is trying to send a message to the DPRK regarding its behavior,” Von Hippel told NK News.
Meanwhile, in what many analysts have called a calculated snub to North Korea’s Kim Jong-Un, China’s President Xi Jinping has avidly courted South Korea’s Park Geun-hye.
During their fifth meeting held in Seoul earlier in July the two presidents spoke about North Korea’s nuclear program. But in stark contrast to the increasingly intimate diplomatic contact between the new leaders of China and South Korea, China’s Xi and North Korea’s Un have yet to meet.
Were it faced with a prolonged shortfall in Chinese oil deliveries, North Korea would likely have to look elsewhere for fuel, with one likely patron being Russia. Relations between North Korea and Russia have seen a marked improvement in recent months after Russian President Vladimir Putin passed a bill to cancel billions of dollars of Soviet debt.
“The only chance to compensate for a longer-term shortfall lies in the crude supply from the Kozmino terminal in Russia”
However, it also remains unclear whether North Korea has strategic petroleum reserves that could be tapped to cover a shortfall. Most oil importing countries hold large quantities of emergency stocks to protect themselves against supply disruptions or price-spikes.
“The only chance to compensate for a longer-term shortfall lies in the crude supply from the Kozmino terminal in Russia. That may be the reason why DPRK is responding positively towards Russia’s effort to restore their relationship.” Dr Keun Wook Paik, associate fellow on energy, environment and resources at London’s Chatham House, told NK News.
Currently, the NK News vessel tracker shows that the majority of North Korea’s small fleet of tankers mainly operate near Vladivostok, likely shuttling between the north eastern Russian region and Rajin, the DPRK’s second largest port. Together the ships can carry 15,313 tonnes of oil between the two ports, though poor AIS coverage in the area makes it difficult to keep track of frequency of their trips.
Vessels marked in red are listed by marine traffic as ‘oil products tankers’. The location of Rajin port is circled in the bottom left
North Korea could also go some-way towards sating its thirst for refined oil products should Mongolian Oil Company HBoil (HBO) deliver on its plans to upgrade the currently shuttered Seungri refinery near Rason.
Last year HBO announced that it bought a 20 percent stake in the mothballed refinery and had plans to upgrade and reopen it. A report by Mongolian investment bank BDsec estimated that Seungri would be “operational no later than January 1st 2015”.
If this were the case the DPRK would have crude supplies from Russia and a nearby refinery to process them.
“The question is whether HBO can secure the fund to implement the trilateral oil trading among DPRK, Mongolia and Russia. If they can, it will be a very interesting development for DPRK, and it will be a real alarm for Washington, Beijing and Seoul. Time will tell how far they can go.” Dr Paik told NK News.
Featured Image: Darrel Nash, Flickr Creative Commons
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