The Significance Of China's LNG Deal With Qatar: It's Not With Russia

Qatar’s state energy company on Monday announced a 27-year deal to supply China with natural gas, purportedly the longest such deal ever struck.

QatarEnergy announced a 27-year natural gas supply deal with China on Monday, calling it the "longest" ever seen as it strengthened ties with Asia at a time when Europe is scrambling for alternative sources.

The state energy company will send four million tonnes of liquefied natural gas annually from its new North Field East project to China Petroleum and Chemical Corporation (Sinopec), it said.

While the deal is undoubtedly a disappointment to Europe, which is aggressively seeking natural gas suppliers to replace the volumes previously imported from Russia, it is also significant that China is placing a long-term order for natural gas with Qatar and not Russia.

The Qatar deal underscores a basic geopolitical reality of the relationship between Russia and China: there is no “friendship”, only “business”, and the “no limits" aspect of their relationship is mostly talk, with much less substance.

Russia’s economic reality is quite simple: it needs to replace the sales of oil and natural gas it has previously made to Europe. Despite additional Chinese purchases of energy commodities, the International Energy Association is projecting that Russia’s oil output will fall by some 1.4 million barrels per day in 2023, after an EU ban on Russian oil takes effect.

The EU will ban Russian crude imports from Dec. 5 and Russian oil products from Feb. 5, depriving Russia of oil revenues and forcing one of the world's top oil producers and exporters to seek alternative markets.

With energy exports being a mainstay of the Russian economy, that loss of export volume is going to hurt Russia’s already battered economy.

For China’s part, the Qatar LNG deal underscores its reality that its choice of importers for energy and other commodities is based solely on what China perceives to be in its best interest, not its “no limits” alliance with Russia. As I noted in describing Russia’s challenges regarding the westward orientation of its energy pipeline systems, China still imports more natural gas from Turkmenistan than from Russia, despite not using the Power Of Siberia pipeline from Russia to capacity.

Russia Has A Pipeline Problem

Even though China’s purchases of Russian energy commodities—including natural gas, oil and coal—has almost doubled, it has done so at the depressed prices Russian oil has commanded in the marketplace since Russia invaded Ukraine.

With oil prices declining despite the projected loss of Russia export volumes from global markets, Russia is not getting any financial windfall from its sales to China.

Nor is China making Russia its primary energy supplier. Despite the increases in Chinese purchases of Russian oil, Saudi Arabia remains China’s major oil supplier.

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.

Moreover, China’s appetite for energy imports appears to be diminishing, with its consumption of natural gas poised for its first decline in 20 years.

According to a researcher with CNOOC, gas demand in the country could see a one percent decline this year, to 363.6 billion cubic meters. China is also expected to cede to Japan the title of the world’s biggest LNG importer as lockdowns have sapped demand for energy this year.

Additionally, China’s oil purchases appear to have peaked at least for the time being.

One could barely ask for a more action-packed week – the prospect of World War III kicking in, a drone missile attack on a tanker in the Middle East, market optimism coming from improving inflation data swiftly nipped in the bud by an ever-worsening coronavirus outlook in China. There, things have gotten so dire that Chinese refiners have reportedly asked Saudi Arabia to cut already nominated December volumes, simultaneously cutting back on other buying, too. China coming back was very much part and parcel of the recent upswing in prices, hence ICE Brent slipping below $90 per barrel again should not come as a surprise. 

Zero COVID restrictions are a driving force behind these reductions of China’s appetite for energy.

All of which makes China’s selection of long term energy partners extremely significant. China is placing a long term bet on Qatari natural gas. It is not placing similar bets yet with Russia. With Chinese energy imports waning, it is prioritizing other nations besides Russia with its energy business.

Which makes the Qatar-China LNG deal disappointing news for Europe, but worse news for Russia. It’s losing global energy business.