Prof. ST Hsieh
Director, US-China Energy Industry Forum
August 25, 2022
There is no tooth fairy in business, the driving force is “profit.” One ancient Chinese proverb explains the “mercantilism” very well: No one will jump into a business deal which is destined to lose money, but if a business has the potential for profit, people will take part risking his/her life.
There is absolutely no reason why “China throws Europe an energy lifeline with LNG resales” other than this deal makes money for China. Of course, Europe has to pay the market price for this “energy lifeline.” Specifically, US is the largest LNG exporter of the world, yet Europe is the staunchest ally for the US in the world, why there is no LNG lifeline from the US? The answer is easy: the price is not right and there is no profit for US LNG exporter in this deal.
There is no morality issue here, even though the current energy crisis in Europe as it pays for this “lifeline deal” is a net result of EU’s pounding on the chest and sanctioned Russian energy after the war in Ukraine broke out on February 24 this year. All indicators show that Europe will have a very cold winter as it faces an unprecedented energy crisis. But the energy crisis induced economy recession in Europe will spillover to every corner of the world.
Another ironic case is that Germany is selling electric power to France even many Germany cities are dimming streetlights now.
War in Ukraine is very unfortunate for the Ukrainians, they face a bleak future for generations. Further, the war will render no winner but a lot of losers. However, profitable businesses always win.
China throws Europe an energy lifeline with LNG resales
Surplus gas eases Russia’s stranglehold, but gives Beijing outsize influence
August 24, 2022 11:58 JST MISA HAMA, Nikkei commodities
TOKYO — Europe’s fears of gas shortages heading into winter may have been circumvented, thanks to an unexpected white knight: China.
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.
As a result, Europe’s imports of LNG grew 60% year-on-year in the first six months of the year, according to research firm Kpler. The 53 million tonnes that the bloc purchased surpasses imports by China and Japan and has brought Europe’s gas-storage occupancy rate up to 77%.
If this current trajectory continues, Europe is likely to reach its stated goal of filling up 80% of its gas storage facilities by November.
But while China’s economic slump has brought much-needed relief to Europe, it comes with a major footnote. As soon as economic activity bounces back in the communist nation, the situation will quickly reverse. It also makes Europe dependent on Beijing for its energy, which bucks the geopolitical trend whereby the U.S. and its allies are seeking to defend a liberal international order.
For now, however, Europe has been able to avoid an energy crisis.
China’s JOVO Group, a major 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 $100 million.
China’s biggest oil refiner Sinopec Group also acknowledged on an earnings call in April that it has been channeling excess LNG into the international market.
Local media have said that Sinopec alone has sold 45 cargoes of LNG, or roughly 3.15 million tonnes. The total amount of Chinese LNG that has been resold is likely above 4 millions tonnes, equivalent to 7% of Europe’s gas imports in the January-June half year.
So what has led energy-hungry China to change course and become a seller?
First, its sluggish economy. Real gross domestic product growth for the first half was a mere 2.5%. “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, a senior analyst at the Marubeni Research Institute. “It doesn’t look like it will increase much more in the second half,” she said.
Second is a directive from the central government to bolster energy production, including coal. “The emphasis is now on energy security, more than reducing the environmental footprint,” said Mika Takehara, a senior researcher at the Japan Oil, Gas and Metals National Corporation.
Shanxi Province, for instance, has increased coal production by 100 million tonnes to 1.3 billion tonnes this year, and will further add 50 million tonnes in 2023, according to local media.
China’s own gas production is also expanding. Domestic production of gas is expected to grow 7% year-on-year in 2022, according to gas consulting firm Sia Energy.
China’s LNG imports, on the other hand, will likely decline 20% for the year.
China’s decreased imports have impacted international prices. LNG prices in Asia are currently around $45 per million British thermal units — more than $10 cheaper than European natural gas, which goes for over $60 per million BTU.
The difference in prices reflects the gap in demand. Last year, when China bought aggressively from the spot market, Asian prices were higher than in Europe.
Today, the demand is in Europe. Russian gas supply to Europe is at a 40-year low according to the U.S. Energy Information Administration. Gas running through pipelines is just 20% of what it was a year ago.
Europe has responded by buying LNG on the spot market — regardless of the higher prices — and has agreed to reduce natural gas consumption by 15% by March next year.
Through these emergency measures, Europe looks to weather the coming winter, even if pipeline flows are 80% lower than normal times.
But there is always the possibility that gas imports from Russia could ultimately fall to zero, Toshiyuki Makabe, an analyst at Goldman Sachs said.
In that scenario Europe would have to purchase almost everything left on the spot market — an unrealistic task.
The hidden outcome of these developments is that China is increasing its clout in the energy market.
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.
The “Power of Siberia” natural gas pipeline that runs between Russia and China has capacity to carry more gas.
The amount of gas that China itself produces will also affect Europe’s energy procurement plans.
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.