China Is the Wild Card in the Energy War With Russia

https://www.nytimes.com/2022/10/07/business/china-russia-energy-oil-gas.html

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Just 12 months ago, China’s economy was growing too fast for its energy sector to keep up. Blackouts darkened vast factory districts. Office high-rises were evacuated minutes before they lost electricity for elevators. Municipal water systems stopped pumping for lack of power.

Today China faces the reverse. Growth has slowed so rapidly that tens of millions of young people are without jobs and businesses teeter at the brink of bankruptcy.

And as the economy skids, China is importing far less energy — almost two million barrels of oil a day less than expected in August, and one-sixth less natural gas than a year earlier.

The sharp decline in demand by China, the world’s second-largest economy, is helping slow price rises sparked by Russian’s invasion of Ukraine. China’s slump in energy consumption is also offering an unintended assist to the U.S.-led efforts to choke off the enormous revenues Russia reaps as an energy exporter.

The most recent move by Ukraine’s allies came on Wednesday. The European Union, which begins an embargo on Russian oil this winter, agreed to a plan to cap the prices that Russia can charge for oil that it sells to countries not in the European Union using ships or insurance from Europe.

But even as China reduces its overall energy imports, it has increased its purchases of fossil fuels directly from Russia next door. Chinese oil refineries and gas distributors have been snapping up fuel at deeply discounted prices while Moscow has less clout to negotiate.

China’s role as a friend of Russia and the world’s largest importer of crude oil — and second-largest importer of natural gas after Europe — makes it harder for the West to isolate Russia.

“The friendship between China and Russia means that in the case of oil and gas, there is a geopolitical challenge for the West,” said Philip Andrews-Speed, a China energy specialist at the National University of Singapore.

The question is what happens next.

On Wednesday, OPEC Plus, the oil producers’ group led by Russia and Saudi Arabia, said it would reduce production by two million barrels a day — a measure opposed by the Biden administration. The production cut almost exactly offsets the lost demand in China.

What’s more, if the Chinese economy’s demand for energy rebounds in the coming months, China’s increase together with the OPEC Plus cuts could strain the limits of global energy supplies and make it much harder for the European Union to limit price increases.

China’s energy use began slowing at the end of March, Dong Wancheng, deputy planning director at the National Energy Administration, said in August. That was also when Shanghai began a two-month Covid-zero lockdown that paralyzed one of Chinas’s most important hubs of economic activity.

The government severely limited truck traffic in or near Shanghai, cutting consumption of diesel fuel. Roads were closed, reducing gasoline used by motorists. Factories ran short of components to assemble and curtailed operations or closed, reducing electricity use.

“We’re not crazy tight in the oil market because China’s Covid-zero policy has suppressed demand,” said Alex Turnbull, a commodities analyst at Keshik Capital, a Singapore investment fund.

But China’s economic troubles this year have not been limited to steps meant to contain the coronavirus pandemic.

A real estate bust has slowed apartment construction. That has hurt the energy-guzzling steel and cement sectors.

Factories, another sizable category of electricity use, are also curtailing operations or closing in China. Many households in the West are paying less attention to the pandemic, and buying fewer Chinese-made gadgets and furnishings for their homes. They are spending more money on travel, restaurant meals and other services instead.

China’s oil and gas imports took a nosedive in August, the most recent month available, data from China’s General Administration of Customs show. China imported 9.4 percent fewer barrels of crude than a year earlier, and imports of refined products like diesel were down 35.4 percent.

For natural gas imports, tonnage was down every month from January through August this year compared with the same period last year, reaching a drop of 15.2 percent in August.

China’s dwindling need for natural gas has directly helped Europe in at least one way. Chinese state-controlled companies have longstanding contracts for regular shipments by sea of low-cost liquefied natural gas from countries like Qatar. But the Chinese companies have recently resold many of those cargoes to Europe instead of taking delivery of them, said Yan Qin, a China energy analyst for Refinitiv, a London-based data company.

Together with China’s reduction in oil imports and broader signs of weakness in the global economy, the effect on energy prices has been significant. World oil prices have fallen steadily since a peak in early June. Natural gas prices have fallen since late August as well.

Weak demand from China helped drive down the price for Brent crude oil, the international benchmark, below $85 a barrel in recent weeks, before it bounced back above $90 this week as OPEC Plus prepared to act.

If China’s consumption had continued at previously expected levels, “we would at least have stayed at the June highs, so we would have stayed at $120 or $125” per barrel, said Saad Rahim, the chief economist at Trafigura Group, a Geneva-based commodities giant that is one of the world’s largest oil traders.

Whether China’s oil and natural gas will stay weak in coming months is unclear.

The government might gradually ease Covid controls after a Communist Party congress that begins on Oct. 16. China is starting to spend more on the construction of roads and other infrastructure, which requires considerable diesel for excavators and trucks.

Lin Boqiang, dean of the China Institute for Energy Policy Studies at Xiamen University, said that with a recent decline in oil prices, Chinese companies were already becoming more willing to take the financial risk of buying large quantities of crude oil to refine into gasoline, diesel, jet fuel and other materials.

The big dilemma for China now lies in how much to count on Russia for energy.

Russia and Saudi Arabia were China’s largest suppliers of oil in the first seven months of 2022, with each supplying a sixth of China’s oil imports, according to an analysis by the Peterson Institute for International Economics. Russia was also China’s fifth-biggest supplier of natural gas.

China has leaned toward Russia during the Ukraine war, echoing Russia’s disinformation campaigns while not visibly undermining Western sanctions. But China has long tried not to be overly dependent on a single energy supplier, and has seen Europe scramble after Russia turned off the taps for natural gas deliveries.

Vladimir V. Putin, the Russian president, has called for shifting Russia’s exports from Europe to Asia. A week before a summit on Sept. 15, Mr. Putin said details had been agreed for a new pipeline that would take Russian natural gas across western Siberia and Mongolia to China.

But when Mr. Putin, President Ukhnaagiin Khurelsukh of Mongolia and Xi Jinping, China’s leader, met a week later, the pipeline deal was not announced, nor has any deal been publicly revealed since then.

Gazprom, the Russian energy giant, subsequently turned off natural gas flows to China through a different pipeline in eastern Siberia for more than a week, saying the pipeline needed maintenance. That hurt Russia’s reputation in China for reliability, but Chinese energy experts have tended to accept that the pipeline needed repairs.

“China should avoid a situation in which Russia becomes its largest source of fossil fuel imports,” said Kevin Tu, a Beijing energy consultant and former China program manager at the International Energy Agency in Paris. “In case of a dramatic adjustment in international relations, it may have a great impact on China’s energy security.”

Alan Rappeport contributed reporting from Washington. Li You contributed research.