China throws Europe an energy lifeline with LNG resales
Europe’s fears of gas shortages en route to winter may have been evaded thanks to an unexpected white knight: China.
The world’s largest buyer of liquefied natural gas is reselling some of its excess LNG shipments due to weak energy demand at home. As a result, the spot market has a wide range that Europe has tapped, despite the higher prices.
As a result, European LNG imports grew 60 percent year on year in the first six months of 2022, according to research firm Kpler. The 53 million tons bought by the block surpasses imports from China and Japan and has brought the gas storage utilization rate in Europe to 77 percent.
If this continues, Europe will likely reach its stated goal of filling 80 percent of its gas storage facilities by November.
But while China’s economic slump has brought much-needed relief to Europe, it adds an important footnote. Once economic activity in the communist nation revives, the situation will quickly reverse. It also makes Europe dependent on Beijing for its energy, which goes against the geopolitical trend of the US and its allies trying to defend a liberal international order.
For now, however, Europe has been able to avoid an energy crisis.
The Chinese JOVO Group, a major LNG trader, recently announced that it had resold an LNG cargo to a European buyer.
A futures trader in Shanghai told Nikkei that profits from such a trade could run into the tens of millions of dollars or even reach $100 million.
China’s largest oil refinery Sinopec Group also acknowledged during a profit call in April that it has channeled excess LNG into the international market.
Local media have said Sinopec alone has sold 45 shipments of LNG, or about 3.15 million tons. The total amount of Chinese LNG resold is likely to be more than 4 million tons, equivalent to 7 percent of European gas imports in the half-year to the end of June.
So what led energy-hungry China to change course and become a seller?
First, the sluggish economy. Real gross domestic product growth in the first half of the year was only 2.5 percent. “Urban lockdowns led to a decline in demand for industrial fuel and chemicals, which in turn resulted in lower gas demand in the first half,” said Xuelian Li, senior analyst at the Marubeni Research Institute. “It doesn’t look like it will increase much more in the second half,” she said.
Second, there is a directive from the central government to strengthen energy production, including coal. “The emphasis is now on energy security, more than reducing the carbon footprint,” said Mika Takehara, senior researcher at the Japan Oil, Gas and Metals National Corporation.
For example, Shanxi Province has increased coal production by 100 million tons this year to 1.3 billion tons and will add another 50 million tons by 2023, according to local media.
Our own gas production in China is also expanding. According to gas consultancy Sia Energy, domestic gas production is expected to grow by 7 percent annually by 2022.
China’s LNG imports, on the other hand, are likely to decline by 20 percent this year.
Reduced imports from China have impacted international prices. LNG prices in Asia are currently about $45 per million British thermal units – more than $10 cheaper than European natural gas, which costs more than $60 per million BTU.
The price difference reflects the gap in demand. Last year, when China bought aggressively on the spot market, prices in Asia were higher than in Europe.
Today the demand is in Europe. Russia’s gas supply to Europe is at its lowest point in 40 years, according to the US Energy Information Administration. Gas flowing through pipelines is only 20 percent of what it was a year ago.
Europe has responded by buying LNG on the spot market – regardless of higher prices – and has agreed to cut natural gas consumption by 15 percent by March next year.
With these emergency measures, Europe wants to get through the coming winter, even if the pipelines are 80 percent lower than in normal times.
But there’s always the possibility that gas imports from Russia will eventually drop to zero, said Toshiyuki Makabe, an analyst at Goldman Sachs.
In that scenario, Europe would have to buy almost everything on the spot market – an unrealistic task.
The hidden outcome of these developments is that China is increasing its power in the energy market.
If Russia eventually starts exporting more gas to China as a means of punishing Europe, China will have more capacity to resell its excess gas to the spot market, indirectly helping Europe.
The Power of Siberia natural gas pipeline that runs between Russia and China has the capacity to carry more gas.
The amount of gas China produces itself will also affect Europe’s energy purchasing plans.
The more desperate Europe becomes about its energy supply, the more power China’s policy decisions will have to influence the bloc. As Europe tries to break free of its reliance on Russia for energy, the irony is that it is becoming increasingly dependent on China.
A version of this article was first published by Nikkei Asia on August 24. ©2022 Nikkei Inc. All rights reserved.