China needs a lot of oil and gas – does Beijing benefit from Russia's isolation?

Created: 05/18/2022, 22:14

By: Christiane Kuehl

Sinopec stand at the Russian raw materials fair Neftegas in April: China cannot compensate for all export losses through embargoes.

© Anton Novoderezhkin/TASS/Imago

Russia urgently needs alternative buyers for its raw materials.

China would be a natural customer.

But a lack of infrastructure and the Omicron wave in the People's Republic have so far slowed things down.

Beijing/Munich – Is China grabbing Russian oil and gas at cheap prices?

And is Beijing thereby thwarting the western sanctions against Moscow?

This question has been on the minds of observers since the start of the Ukraine war.

China is dependent on raw material imports, and Russia's share of this has been increasing for years.

Beijing is also, at least officially, with Moscow: China does not condemn the Russian invasion of Ukraine, but always blames the USA and NATO for the escalation.

So it would be only natural for China to try to protect its own energy interests in the war.

Only the US has imposed an embargo on Russian oil and gas so far;

the EU has been curbing imports since the beginning of the war.

But since there is no formal boycott so far, China would not violate sanctions with higher imports.

The question of how China behaves in the commodity market is crucial for the success of commodity boycotts against Russia by the West.

If China and other countries buy Russian oil, which has now been spurned by the West, the effects of these boycotts are likely to be significantly lessened.

However, there is still no evidence that China is really pouncing on Russian oil on a large scale – unlike India, for example.

Indian buyers secured Russian oil supplies in late March at "record" discounts of $30 and $25 below the market price per barrel.

And this despite the fact that the Ukraine war triggered a rise in crude oil prices to their highest level since 2008.

China's refineries, on the other hand, have so far acted cautiously;

several banks refused to lend to commodity imports from Russia at the outset of the invasion, fearing secondary US sanctions.

Also, in purely practical terms, excess oil and gas cannot simply be diverted to China.

The necessary pipelines are missing.

China and Russia agreed on several pipeline projects before the war.

But it will be years before gas and oil flow through these pipelines.

"The most significant investment, the

gas pipeline , is still under negotiation and there have been no developments on this front since the Ukraine war," said Rob O'Brian of the international law firm Baker McKenzie in a contribution to the China Institute at London SOAS University.

"The capacity of the Sino-Russian pipeline infrastructure is far inferior to the Euro-Russian pipeline infrastructure."

China: Omicron wave prevents import boom for Russian oil?

But there is also the sea route.

, of the 115 tankers that have sailed to Asia in the two months since the war began on February 24 and from Russian ports,

52 went to China, 28 to South Korea, 25 to India and nine to Japan and one to Malaysia.

This means an eightfold increase for India and an increase of 33 percent for China compared to the same period last year.

After all, between March 1st and April 15th, 41 tankers went to the Netherlands, 36 to Italy and nine to Germany.

Meanwhile, it is unclear how many of the 52 tankers that went to China were able to deliver their oil there at all: According to

, there are tankers with 17 to 20 million barrels of oil on board in the roadstead in the middle of the ship jams off the coast of China - mainly from Venezuela and Iran, but also from Russia.

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The reason is Corona: The People's Republic is currently struggling with its first major omicron wave.

Dozens of cities are completely or partially in lockdown, above all the port metropolis of Shanghai, which has been sealed off for six weeks.

The many lockdowns imposed by China due to its zero-Covid policy are stifling consumer demand and disrupting logistics and supply chains across the country.

In April, manufacturing in China shrank 2.9 percent compared to April 2021, and retail sales fell 11.1 percent.

Unemployment, at 6.1 percent, rose back to levels seen during Wuhan's first severe Covid outbreak in early 2020.

China: Currently only limited oil demand

In this respect, it is unclear how much additional oil China can or wants to buy from Russia this year.

China's refineries have announced that they will process four percent less crude oil this year than in 2021. Large Chinese buyers of Russian oil supplies such as the state giants Sinopec, CNOOC, PetroChina and Sinochem initially did not sign any new contracts with Russian suppliers after the outbreak of war.

But in late March 2022, a top executive at oil company Sinopec told

that the company would continue to buy crude oil and gas from Russian suppliers.

Others might follow.

However, China's imports cannot completely replace the missing deliveries to Europe.

The volume of contracts from early February "does not include gas and oil quantities large enough to replace the European-Russian energy trade," writes O'Brian.

The markets have been calm since the outbreak of war.

China and Russia: Strategic interest in resource cooperation

Despite all the difficulties, Beijing and Moscow believe it makes strategic sense to expand deliveries as quickly as possible.

Moscow must find substitute buyers for oil and gas exports that previously went to Europe.

From Beijing's perspective, Russian energy imports, in turn, have the strategic advantage of being delivered overland via pipeline or directly by sea from Russia's Siberian ports.

China currently gets most of its oil imports from tankers sailing through the Strait of Malacca, a strait along the coasts of more US-friendly states like Thailand and Malaysia.

Supply and demand also match: Russia is the third largest oil producer and second largest gas producer in the world, while China is the world's largest importer of oil and gas.

Before the war, China bought around a quarter of Russian oil, and the EU almost half.

Conversely, almost half of Russian exports to China consisted of crude oil (48.3 percent), followed by a range of other energy products.

So far, China has imported 15.5 percent of its crude oil from Russia - so this share can definitely be expanded.

Russia also supplies natural gas from East Siberian gas fields to China via the Power of Siberia 1 pipeline, as well as a smaller proportion of liquefied natural gas (LNG).

The Power of Siberia 2 pipeline would more than double delivery capacity, O'Brian said.

At their summit in Beijing shortly before the invasion, Russian President Vladimir Putin and Chinese President Xi Jinping signed the pipeline agreement.

From 2025, gas from western Siberia is to flow through Mongolia to China.

At the same time, China wants to get more LNG from Russia.

In the months before the Ukraine war, Chinese companies secured several long-term LNG supply contracts from Russia.

According to analyses, China wants to reduce its dependence on LNG supplies from geopolitical rivals such as the USA and Australia.

Russia: Asian markets not a panacea

But the Asian markets have their limits for Russia.

"In this early phase of sanctions and embargoes, Russia will benefit, as higher prices also mean significantly higher tax revenues than in recent years," wrote Daria Melnik, an analyst at energy research firm Rystad Energy, in a study last week.

In order to boost exports to Asia, however, it takes time and massive investments in infrastructure.

"In the medium term, this will lead to a steep drop in Russia's production and income." According to Melnik's calculations, Russia's daily oil production will be almost two million barrels a day lower in 2030 than before the war.

Gas production will decrease by around 100 billion cubic meters by then.

Despite China's imports.

Six weeks of war is too short to see a trend now.

In March, China's oil imports from Russia fell 14 percent from the same month last year.

But their value rose by 30 percent due to the high world market prices.

So far, Russia is still benefiting from the higher prices.

But if Melnik is right, China in particular should ultimately benefit from the situation.