How China’s energy outlook has been reshaped by the Ukraine war
- In the past year, the flow of Russian energy products to China has increased, with importers taking advantage of discounted prices
- But growing Russian oil and gas imports pose a risk, adding to perceptions of a strong Moscow-Beijing alliance amid a more politicised global energy market
As the Ukraine war enters its second year with no end in sight, there is one foregone conclusion that affects almost every country in the world: the conflict has profoundly reshaped the global energy market.
The Russian invasion and subsequent Western sanctions have heaped enormous strain on oil and gas markets, put climate goals on the back burner, and forced nations to re-evaluate long-standing supply relationships.
For China, the world’s largest energy importer and consumer, the long-term outcome is still murky.
China’s energy security focus sharpened by Ukraine war supply pressures
In the short term, the war has enhanced China’s oil supply security because Chinese refiners have been able to buy Russian crude at a discount, according to Erica Downs, a senior research scholar at the Centre on Global Energy Policy at Columbia University.
“Additionally, the fact that the war has made China an even more important market for Russian hydrocarbons as a result of Western sanctions might provide China with leverage in future negotiations over new supply contracts,” she said.
But China’s reliance on oil and gas imports – and heavy trade with Russia – leaves it exposed, especially as the global energy market has become more politicised following the start of the war.
Over the past few years, China has imported more than 70 per cent of its crude oil and more than 40 per cent of its natural gas, according to the Post’s calculation based on data from China Customs and National Bureau of Statistics.
Crude oil is the single most valuable commodity in China-Russia trade, accounting for half of Chinese imports. Last year, China’s Russian crude imports increased by 8 per cent in volume, but 44 per cent in US dollar terms – a historic high driven by soaring energy prices thanks to the Ukraine war.
Kang Wu, head of Global Demand and Asia Analytics at S&P Global Commodity Insights, said taking into account price spikes, higher inflation and elevated interest rates caused by the war, China has hardly benefited.
“In fact, China ends up paying much more for imported oil with higher prices,” Wu said. “While Russia receives substantially less for every barrel of oil sold because of deep discounts they have to offer, final discounts seen by China as the end user are less except when Chinese companies directly import from Russia.”
Though China has mitigated economic risks by importing more Russian crude at lower prices in the past year, a stable oil market without geopolitical conflict would be preferable, Wu said.
Security and affordability is the priority for the global energy industry in 2023, with the outlook still clouded by geopolitical turmoil, according to a report published in January by Energy Intelligence, a leading energy information company.
“The global re-routing of Russian oil flows from Europe to new markets will consolidate, China will be more cautious but could also step up,” the report said. “Re-routing Russian gas flows will be harder and time consuming, requiring new infrastructure and Asian [especially Chinese] appetite.”
Starved of chips, China faces ‘unprecedented’ pressure to become No 1 economy
The global energy crisis is also likely to deepen ties further between China and Russia, according to the report.
But Wang Nengquan, a Chinese energy expert based in Beijing, said China, like Europe, has learned it cannot be too dependent on one country for energy.
“Relations between countries can change overnight, and the focus of these relationships is only about interests, not friendship,” Wang said.
Russia was China’s second largest source of oil last year, accounting for 16.9 per cent of total imports, up 1.4 percentage points on 2021, according to the Post’s calculation based on China Customs data. China bought 17.2 per cent of its oil from Saudi Arabia.
Despite growing imports over the past year, Chinese authorities and companies appear to be taking a cautious approach when it comes to signing new long-term energy and investment deals with Russia against the backdrop of the Ukraine war, said Downs.
“There has been no agreement signed for the Power of Siberia 2 pipeline and China’s companies have not bought assets in the Russian upstream,” she said.
Currently, most Russian gas is supplied to China through the China-Russia East-Route pipeline, making Russia the country’s second-largest pipeline gas supplier after Turkmenistan. The route consists of a 3,000km (1,864-mile) segment – called the Power of Siberia – in Russia’s far east, and a 5,111km Chinese section that ends in Shanghai. The entire route is expected to be fully operational before 2025.
Signed in 2014, the contract between China National Petroleum Corporation and Russia’s Gazprom to supply gas via the pipeline was estimated to be worth US$400 billion over 30 years.
Chinese officials tend to view land-based energy deliveries as more secure, but they might not want to commit to an additional gas pipeline from Russia, according to Elizabeth Wishnick, senior research scientist at CNA, a US-based non-profit research and analysis organisation.
“Energy experts say that China may not need the gas in the short term due to plans to expand deliveries from Turkmenistan.” she said. “Moreover, China has always been sceptical about the security of pipelines that transit third countries, as this one [Power of Siberia 2] would, transiting Mongolia,” she said.
“But I think the real risk for China is regarding Russia’s long-term stability,” she said. “And the Sino-Russian strategic partnership notwithstanding, may not want to be even more exposed to the vagaries of an unpredictable leadership.”
While the flow of Russian energy products – especially gas – to China has increased in the past year, Chinese imports from other major suppliers have been stable.
But with new long-term oil and gas contracts signed between Chinese firms and countries such as Saudi Arabia, Qatar and the United States, supplies from these sources are poised to grow too, experts said.
“It is Russia’s need to increase the Chinese purchases of Russian natural gas, not China’s need,” said He Weiwen, a former economic and commercial counsellor at the Chinese consulates in New York and San Francisco, who is currently a senior fellow with the Beijing-based Centre for China and Globalisation.
Though China’s energy imports might come under greater scrutiny in the future, there will be no major politically driven changes in the short term due to a host of technical and logistical issues, said Zha Daojiong, a professor of international political economy at Peking University.
“One such reality is that switching to a different crude requires adjustment in the refining processes and can incur issues in profit margins,” he said. “In addition, an importing company has to factor in issues like contractual commitments and transport costs to pay.”
China’s ‘disappearing market confidence’ presents major test for Beijing
Even if China sought to replace energy imported from Russia with comparable amounts from other countries – including those that sanction Moscow – there could be policy blowback, he said.
“This is a legitimate question, as for any energy exporting economy, drastic growth in exports can lead to increase in domestic energy prices,” said Zha.
Still, China will have to pay some diplomatic cost in its relations with governments like the US and Europe if it continues to buy cheap energy from Russia, analysts said.
“There are not many people in this world who can do business with others without taking into account whether they have the same values,” said Kung Chan, founder of think tank Anbound. “The view that ‘economy is economy’ is seriously outdated.”