China Continues To Snub Russia With LNG Deals

It is becoming clear that China’s long term energy strategy does not revolve around Russia. Indeed, while Chinese fossil fuels exports from Russia are up from one year ago, China is locking in LNG supply contracts…with everyone but Russia.

China's Shenzhen Energy Group (000027.SZ) has signed a long-term agreement with oil major BP (BP.L) to buy liquefied natural gas (LNG), aiming to lock in supplies with gas-fired power generation poised to surge in the world's second-largest economy.

The agreement is Shenzhen Energy's first long-term international LNG contract and its first long-term contract with BP Singapore, the Chinese company said in a statement on Friday.

Coming on the heels of China Sinopec’s 27-year deal with QatarEnergy, the BP deal is the second long-term deal made by China recently—and the second such deal that does not involve Russia.

The driving force behind these long term contracts is China’s plans to move away from its relatively dirty and polluting coal-fired power plants to cleaner natural gas facilities. Moreover, as I have discussed previously, China’s draconian Zero COVID policy has impacted even native coal production, raising questions about China’s short-term energy security for the coming winter.

Does China Have Enough Energy For The Coming Winter?

China has greatly stepped up purchases of Russian oil, natural gas, and coal since the start of the Russo-Ukrainian War, even in the face of declining demand for energy resources.

Russian sales of liquefied natural gas expanded by more than half from a year ago to 756,000 tons in October, despite a 34% decline in China’s overall purchases of the super-chilled fuel. China hasn’t reported imports via pipelines, the main conduit for Russian gas, since the start of the year. 

Coal imports from Russia increased 26% to 6.4 million tons. Some 2.4 million tons of that was coking coal for the steel industry, three times the amount of a year ago, although slightly lower than the record hit in September.

Still, based on industry data, China has bought more natural gas from Turkmenistan than from Russia, despite Russia having invested heavily in a pipeline to deliver natural gas directly into China.

Russia Has A Pipeline Problem

China has taken advantage of the markets’ deep discounts on Russian energy exports to buy more Russian oil, coal, and natural gas, yet is still maintaining a fair degree of diversity in its energy imports, as the recent LNG deals demonstrate.

In part, this is simply China doing good business. While the EU sanctions on Russian oil and natural gas have created a buying opportunity for China, a coming EU ban on the financing and insuring of Russian crude shipments is set to raise a significant obstacle for continuing that buying opportunity, as few carriers are prepared to risk their vessels to ship uninsurable cargoes.

Oil imports from Russia rose 16% to 7.72 million tons last month, a volume topped only by Saudi Arabia, according to Chinese customs data. The increase comes as China’s refiners seek Beijing’s help to keep Russian cargoes flowing after new sanctions are imposed early next month. From Dec. 5, the European Union is set to ban the financing, insuring and shipping of Russian crude, which will force importers to find workarounds that don’t involve banks, insurance clubs and shipowners from the bloc.

Buying Russian hydrocarbon exports even as internal energy demand diminishes has simply been a question of leveraging market prices for China, although even with China’s increased purchases, Russian oil revenues have been declining recently.

According to the International Energy Agency’s monthly oil market report in September, Moscow’s oil revenues had shrunk to US$15.3 billion (S$21.1 billion), the lowest for 2022.

Russian LNG exports are expected to allow China’s LNG importers to avoid the more costly spot markets this coming winter, yet Russian natural gas does not appear to be receiving any preference over other suppliers for longer term contracts.

This is a notable exclusion, as Russia is struggling to restore production at its Sakhalin-1 oil and natural gas terminal, which had been shut down following partner ExxonMobil’s departure from Russia in response to Russia’s invasion of Ukraine.

Russia Is Attempting To Restart Sakhalin-1

It is not an exaggeration to presume that Russia very much needs China’s energy business.

However, as the QatarEnergy deal indicates and as this latest BP deal confirms, while Russia remains a very willing and eager seller of hydrocarbons to the Chinese market, China is taking a rather reluctant view of being a long-term customer.

Given Russia’s likely loss of Europe as an energy export customer for at least the foreseeable future, China’s demonstrated hesitancy in embracing Russian supplies does not augur well for the future of Russia’s energy producers.