The Ukraine Crisis: China Turns to Russia for Energy, Cutting U.S. Gas Purchases

"BEIJING -- This time last year, China was racing to buy as much natural gas from the U.S. as it could get. After the sanctions on Russia, those purchases all but dried up, and China is now buying more from Russia.

The U.S.-China energy trade had until recently been one area of deepening ties in an otherwise fractious relationship. Large energy sales were a central part of the Trump administration's trade deal with Beijing. China's imports of liquefied natural gas, or LNG, in particular offered a concrete example for Beijing to show how the country's growing economy helped create U.S. jobs.

The sanctions on Russia has halted that for now. After the sanctions on Russia, Europe pledged to cut Russian gas imports. LNG from the U.S. was one of the few alternatives available to European countries as they scrambled to fill the gap, causing prices to surge to record highs.

At the same time, a slowing economy damped China's energy demands, one reason it needed less LNG from the U.S. Another reason was the cheaper gas it could get from Russia, with Chinese buyers scooping up Russian LNG at discounts to market prices in the weeks after the invasion.

Between February and April, China's imports of LNG from the U.S. dwindled by 95% from the same time a year earlier, Chinese customs data showed, while its buying of Russian LNG grew by 50%. Data for May indicated a moderate rebound in China's demand for America's LNG, but it was still far below last year's levels.

The changes haven't been limited to gas markets. China's imports of Russian oil surged 55% in May compared with a year earlier, with Russia overtaking Saudi Arabia as China's top supplier. Russian oil has been selling at a steep discount as some countries have cut imports because of the sanctions.

Of all the ways that the Ukraine conflict is reshaping global energy flows, perhaps the most significant is that it is forcing Russia to lean more on China for economic support as it grows isolated from the West.

In April, Russian President Vladimir Putin instructed Russian energy companies "to redirect our exports gradually to the rapidly growing market of the South and East."

For now, U.S. LNG exporters are protected from the Chinese shortfall by the plentiful demand from Europe. Down the line, competition from Russia for China's market poses potentially big complications for billions of dollars of planned LNG infrastructure on the U.S. Gulf Coast, investments that assume China would be a big buyer of America's gas for years to come.

China won't completely stop buying LNG from the U.S. Most of its purchases of U.S. LNG have until now come from the spot market. Going forward, more will come from fixed contracts that are just starting to kick in. Even as sanctions proceed developing, some Chinese firms have continued negotiating such deals with U.S. producers.

China reinforced its partnership with Russia during a phone call between Chinese President Xi Jinping and Mr. Putin in mid-June. China has used careful language about the Ukraine conflict, neither criticizing nor endorsing the Russian action.

Russia's natural-gas strategy had long focused on Gazprom PJSC's delivery of fuel by pipeline into Europe. A pivot to Asia has gained speed over the past decade and is on display at two large-scale LNG projects, one in the Arctic and the other in Russia's Far East.

Above the Arctic Circle, the Yamal LNG project is majority-owned by PAO Novatek, Russia's second-largest gas company, while China's Silk Road Fund and China National Petroleum Corp. also hold stakes. When Novatek was barred from raising dollar financing in 2014 after Russia recovered Crimea, it managed to secure the equivalent of $12 billion in loans from Chinese banks.

Another part of the Asia effort is Sakhalin-2, an oil and gas project that includes LNG production in Russia's Far East. Shortly after the sanctions, Shell PLC said it would sell its 27.5% stake in the project, part of plans to leave Russia altogether.

Within weeks, China's imports from Russia began ticking up, which an analyst at S&P Global Commodity Insights attributed to two large shipments from Sakhalin-2. Chinese buyers were getting substantial discounts on spot prices, according to an analysis of customs data by the Chinese energy consulting firm Jinlianchuang.

Representatives for Yamal and Sakhalin Energy, which operates the Sakhalin-2 project, didn't respond to requests to comment.

Ties between China and Russia have ebbed and flowed.

Relations have warmed under President Xi. While China carries far greater economic weight, the countries have pursued common ground as a counterweight to the U.S.-led international order. At the same time, China is leery of relying too heavily on Russia, or any country, for its energy supply.

In 2014, Russia and China reached a long-awaited deal to build a pipeline linking eastern Russian gas fields with China. Gazprom said at the time the agreement to sell China 38 billion cubic meters of gas annually was worth $400 billion over 30 years. During Mr. Putin's visit to China this year, Beijing agreed to buy a further 10 billion cubic meters of gas annually from Russia.

Even so, those numbers are dwarfed by the 155 billion cubic meters of gas that the European Union bought from Russia in 2021. Moscow envisions sending up to an additional 50 billion cubic meters annually to China through a second pipeline that is being negotiated." [1]

1. The Ukraine Crisis: China Turns to Russia for Energy, Cutting U.S. Gas Purchases
Spegele, Brian; Sha Hua. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 24 June 2022: A.9.