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Page added on March 26, 2022

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Will China Buy Russian Natural Gas and Oil Exports in the Wake of Ukraine?

Consumption

Ever since the U.S. the European Union, and other nations imposed sanctions on Russia for its invasion of Ukraine, outside observers have wondered whether—and to what extent—China will help Russia weather the blows to its economy. Energy features prominently in such discussions for several reasons.

First, Russia is the world’s third-largest oil producer and its second-largest producer of natural gas. Western sanctions have stopped the flow of technology and capital to Russia’s oil and natural gas industry, and traders are currently shunning barrels of Russian oil.

Second, China is the world’s largest importer of crude oil and natural gas, and Russia was its second-largest oil supplier and its third-largest natural gas supplier in 2021. Moreover, less than three weeks before Russian troops marched into Ukraine, China’s leader, Xi Jinping, and Russia’s president, Vladimir Putin, declared that their countries’ friendship had “no limits.” In addition, Chinese officials have stated that China will not participate in Western sanctions and that normal trade and economic cooperation with Russia will continue.

Will China, perhaps motivated by energy security concerns or the opportunity to secure supplies at attractive prices, purchase more Russian oil and natural gas and, in the process, throw Russia an economic lifeline?

There is precedent. In May 2014, in the wake of the imposition of Western sanctions on Russia for the annexation of Crimea, Putin traveled to China to attend a meeting of the Shanghai Cooperation Organization. During his visit, Russia’s state pipeline monopoly, Gazprom, and China National Petroleum Corporation signed an agreement for the delivery of 38 billion cubic meters of natural gas over 30 years through the Power of Siberia Pipeline. Two Chinese banks also agreed to provide Russia’s largest independent natural gas producer, Novatek , with $12.5 billion in euros and renminbi to develop the first liquified natural gas project in Russia’s Far North.

Fast forward to March 2022.

In the short term, there are limits to the amount of additional oil and especially natural gas that likely will flow from Russia to China.

First, the number of extra barrels of Russian oil that is absorbed by China is likely to be shaped by a variety of factors. These include how many barrels can be displaced from other suppliers, the availability of refining and storage capacity, prices and the impact of China’s Covid lockdowns on its oil demand.

Second, Western sanctions appear to be limiting Chinese purchases of Russian oil. For example, China’s independent refiners, which are concentrated in northeast China and favor Russia’s ESPO crude, and the Chinese banks that provide them with letters of credit, have been acting with caution due to concerns about running afoul of future U.S. sanctions. There have been reports of some independent refiners putting ESPO crude purchases on pause due to uncertainty over sanctions and others being forced to find alternative payment methods for Russian oil after banks refused to provide letters of credit. Similarly, state-owned refiners seeking to purchase Russia’s Urals crude, which is trading at a record discount to Brent crude, are reportedly having trouble finding shipping companies willing to transport Russian barrels.

Third, Russia’s natural gas export pipelines are in the wrong place for it to divert supplies bound for Europe to China. The capacity of Russia’s eight major pipelines currently delivering natural gas to Europe is 220 bcm, nearly six times that of the one pipeline delivering natural gas to China, the Power of Siberia (38 bcm), which is not yet operating at full capacity. Moreover, the natural gas that Russia delivers to Europe and China by pipeline is supplied by different fields that are not connected.

Russia may have more success in diverting some LNG exports to China. LNG is transported from Russia to China by ship instead of a cross-border pipeline. But the volumes available for diversion are small. In 2020, Russia exported 17.2 bcm of LNG to Europe, and China imported 94 bcm (including 6.9 bcm from Russia), of which almost 40 bcm were spot purchases (as opposed to sales under term contracts). These numbers suggest China has the capacity to absorb more Russian LNG.

In the long term, Russia’s invasion of Ukraine will very likely result in an even more robust China-Russia energy relationship.

The European Union’s plan to phase out Russian oil, natural gas, and coal is likely to galvanize Putin to accelerate the development of infrastructure to expand natural gas exports to China. The two countries took another step in this direction during Putin’s visit to Beijing in February, when Gazprom and China National Petroleum Corporation agreed to build a new 10 bcm pipeline to deliver natural gas from the Russian Far East to China. When complete, this project will expand Russia’s export pipeline capacity to China by almost 25% to 48 bcm.

Putin, however, is likely to want Beijing to agree to an even bigger pipeline, the Power of Siberia II. This long-discussed project would have the capacity to deliver 50 bcm of natural gas from West Siberia (some of which is currently exported to Europe) to China via Mongolia. If Russia were to sign a supply contract with China for natural gas to be delivered through the Power of Siberia II, then Gazprom would build an interconnector between its pipelines that flow to the west and the east, which would allow the company to send to China natural gas from fields that currently only supply Europe.

The Power of Siberia II is probably attractive to China because it can deliver a large volume of natural gas—more than one-third of China’s imports in 2020—overland. Not only would gas shipped via the Power of Siberia II avoid the risks associated with traveling long distances through the sea lines of communication. It would also be dispatched from a country whose capital is highly unlikely to succumb to pressure from Washington to turn off the taps.

That said, one of the hallmarks of China’s approach to energy security has been the diversification of energy suppliers and import routes to avoid becoming excessing dependent on any single supplier or import routes. Would importing 98 bcm of pipeline gas plus LNG from Russia would make China excessively reliant on its northern neighbor? Beijing now has a decision to make.

barrons



One Comment on "Will China Buy Russian Natural Gas and Oil Exports in the Wake of Ukraine?"

  1. Theedrich on Sat, 26th Mar 2022 4:08 pm 

    Dems believe in the divine right of kings. The peasants must pay and obey.  After all, the globalist-paid Leftists are all royalty.  They know better than the peasants because they have power.  So schizophrenics and sociopaths — who manage to get into higher political office by virtue of their wealth or the bribes they accept — are lordly demigods.

    At their head are a crowd of rich Chosenite mutants who hate the White civilization which brought them into existence.  Alas, American culture itself is profoundly œdipal, subconsciously driven to kill its own parents.  Hence the obsessive desire for anything “new” that will abolish the old in civil life.  At the moment, the patricidal Democan/Repubicrat regime is pushing an anti-White female lowland gorilla for a position on the supreme court.  (The Imperial propaganda proclaims that she is “brilliant,” supreme in all things politico-cultural, etc., etc.)  No mention of the role of Affirmative Action policies in lifting her to a position far above her natural status, as they had earlier done in raising a chimpanzoid onto the presidential throne.  The main objective is annihilation of civilization and regression to the jungle.

    Currently, the overwhelming invasion by criminal aliens through the southern border is being deftly obscured by the Washington mafia, which has ignited a proxy war against Russia.  It is following the “Project for a New American Century ” playbook originally written by Yiddish blob Robert Kagan and his fellow Levantine Bill Kristol and advanced in Ukraine itself by Kagan’s wife Victoria Nuland assisted by the CIA, with a violent revolution there in 2014.  The Jewish jokester running the proxy war on that territory is floating on a sea of American weapons in order to accomplish the goals of the PNAC under other names and guises.

    The Empire of Lies may well win this war.  Its true objective, it must be remembered, is not the salvation of Ukraine.  It is the humiliation, destruction and dismemberment of Russia.  Ukraine is only a means to that end, and will be largely abandoned after Russia has been ruined.

    The mutants — such as Kristol, Kagan, Schwab and Sörös — will have proved that theirs is the Master Race.

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