According to the SCMP, China bought a total of 2.35 million tonnes of LNG from Russia and is now aggressively reselling Russian gas to Europe.
We were surprised to learn a month ago that China has been importing more Russian natural gas this year than it has from most other sources, despite a suppressed appetite for energy due to its housing crash and economic downturn (for which “zero covid” has emerged as a convenient scapegoat for emperor Xi).
According to data from Chinese customs, China purchased a total of 2.35 million tonnes of liquefied natural gas (LNG) in the first half of the year, valued at US$2.16 billion, the SCMP reported in July. The value of imports climbed by 182% while the volume increased by 28.7% annually. It means that Russia has overtaken both Indonesia and the United States to take the fourth-largest position among LNG suppliers to China this year so far.
Of course, this should not be confused with pipeline gas, for which the Russian producer Gazprom recently announced that daily supplies to China via the Power of Siberia pipeline had increased to a new record high (Russia is China’s second-largest pipeline natural gas supplier after Turkmenistan), and earlier disclosed that the supply of Russian pipeline gas to China had increased by 63.4% in the first half of 2022.
Analysts wondered what caused this strange increase in Russian LNG shipments. In spite of the fact that China imports over two-thirds of the natural gas it uses, mostly in the form of LNG, this year’s demand was significantly lower due to the global economic downturn and extensive plant closures.In other words, why the increase in Russian LNG when it comes at the expense of everyone else and there is just no domestic demand?
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“The increase in Russian LNG could be a displacement of cargoes going to Japan or South Korea because of sanctions, or weaker demand there,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies.
The General Administration of Customs of China has stopped disclosing the breakdown of trade volume for pipeline natural gas since the beginning of the year. Spokesman Li Kuiwen confirmed that the decision was made to “protect the legitimate business rights and interests of the relevant importers and exporters,” but one thing was clear: China wanted to keep its arms-length gas deal with Russia as obscure as possible.
As the FT just reported, “Europe’s fears of gas shortages heading into winter may have been circumvented, thanks to an unexpected white knight: China.” The Nikkei-owned publications further notes that “the world’s largest buyer of liquefied natural gas is reselling some of its surplus LNG cargoes due to weak energy demand at home. This has provided the spot market with an ample supply that Europe has tapped, despite the higher prices.”
The fact that it is not “surplus” is something the FT avoids, probably on purpose. After all, if it were, Chinese purchases of Russian LNG would cease.
Returning to the story, it is obvious what happened: the Russian pipeline for gas to Europe was effectively shut off…
According to research firm Kpler, Europe’s imports of LNG have increased 60% year over year in the first half of 2022.
China’s JOVO Group, a big LNG trader, recently disclosed that it had resold an LNG cargo to a European buyer.
A futures trader in Shanghai told Nikkei that the profit made from such a transaction could be in the tens of millions of dollars or even reach $100mn.
China’s biggest oil refiner Sinopec Group also acknowledged on an earnings call in April that it has been channelling excess LNG into the international market.
Local media have said that Sinopec alone has sold 45 cargoes of LNG, or about 3.15mn tonnes. The total amount of Chinese LNG that has been resold is probably more than 4mn tonnes, equivalent to 7 per cent of Europe’s gas imports in the half year to the end of June.
Without a doubt, all of this “excess” LNG was partially or completely soured in Russia, but because it was “tolled” in China, it is no longer Russian. It is actually Chinese LNG.
The good news is that the 53 million tonnes the bloc bought has increased Europe’s gas storage occupancy rate to 77%, surpassing imports from China and Japan.
If this keeps up, Europe will probably fill 80% of its gas storage facilities by November, as stated in its declared objective (at which point it will start draining the reserves at a breakneck pace to keep warm during the winter). While China’s economic downturn has provided Europe with much-needed relief, it also has a significant footnote. The scenario will swiftly change, and Beijing won’t export LNG from Russia to keep Europe warm once China’s economy starts to grow again.
Funny enough, it also means that Europe will soon be dependent on Beijing for its energy needs rather than Russia for gas. Since this energy is still Russian gas, it is just being imported from China, which makes fun of US geopolitical ambitions to uphold a liberal international order through its own energy exports.
Worse, while Europe could purchase Russian LNG for price X, it is forced to pay 2X, 3X, or even more in order to virtue signal to the world that it will not support Putin’s regime. In reality, however, Europe is actually paying more to both Xi and Putin, who are benefiting from the overall market scarcity by commanding a premium price.
Amusingly, the FT does hint that Europe is purchasing Russian LNG through China without explicitly saying so:
If Russia ends up exporting more gas to China as a means to punish Europe, China will have more capacity to resell its surplus gas to the spot market — indirectly helping Europe.
Why not simply acknowledge that China is assisting Russia in dodging sanctions while both nations profit greatly in the process? Because if that happened, the FT’s own judgement would be called into question. After all, the publication is a conduit for neoliberal thinking, which demanded a total embargo on Russian energy, an embargo that even the WSJ now acknowledges has disastrously backfired (see “Russia Confounds the West by Recapturing Its Oil Riches“).
Despite the FT’s shortcomings, the publication is correct that China’s influence over Europe will grow the longer a hypocritical Europe continues to circumvent Russian sanctions by signalling its virtue so loudly when the adversary is Russia while remaining silent when it is China:
The more desperate Europe becomes about its energy supplies, the more China’s policy decisions will have the power to affect the bloc. As Europe attempts to wrestle out of its dependence on Russia for energy, the irony is that it is becoming more dependent on China.
In the end, all Europe has done is swap out one energy master for another, despite the fact that both are joined at the hip and laughing at the foolishness of Brussels, which under the wise counsel of a petulant Scandinavian teenager made all of this possible just in time for China to invade Taiwan without a peep from Europe’s virtuous signalers. China, along with Putin, now determines Europe’s daily energy intake.