The Ukraine War, ongoing since February 2022, initially led the world to anticipate a decline in energy supply from Russia due to disruptions in the supply chain caused by the war. Surprisingly, however, the situation unveiled a different reality. Despite the conflict, the export of Russian crude oil experienced a substantial increase, with a surging demand in various countries.
Before the outbreak of the conflict, the global south had been experiencing a period of robust economic growth. Notably, nations like China and India were on a trajectory to surpass several advanced economies. Although China had already established itself as the leading exporter of numerous goods, the conflict had a disruptive impact on its growth trajectory. India faced a similar setback. With its substantial population, China was experiencing unparalleled economic growth and was on its way to solidifying its position as a formidable economic force.
However, the outbreak of the war halted this progress. Additionally, the disruption in the supply of oil from the Middle East further accentuated the situation. Amidst Western sanctions, Russia managed to maintain an unbalanced but significant flow of its crude oil to China through several strategic supply systems. Consequently, China emerged as one of the foremost importers of Russian crude, underscoring the significance of the China-Russia Strategic Partnership in facilitating this monumental trade. This shift brought about an evident convergence between demand and supply. This article aims to delve into these intricacies and shed light on the dynamics of this complex trade scenario.
Ever since the commencement of the war in Ukraine, Russia, a significant player in the global oil market, has solidified its energy connections with China, the second-largest oil consumer globally, trailing only the United States. Beijing has dismissed Western disapproval of its increasing alliance with Moscow in light of Russia’s involvement in the Ukrainian conflict. It maintains that these ties adhere to international standards, emphasising China’s autonomy to engage in partnerships with any country it deems fit.
As per China’s trade statistics, the growth in China’s trade with Russia, both in terms of imports and exports, accelerated on a year-on-year basis in September compared to August. Bilateral trade volume soared to $21.18 billion last month, marking the highest point since February 2022, when Russia initiated its military actions in Ukraine.
In September, Chinese Commerce Minister Wang Wentao highlighted that the economic and trade collaboration between China and Russia had deepened and strengthened under the ‘strategic direction’ of the two leaders. The following enumerates some critical energy initiatives and progress between Russia and China:
Sino-Russian Oil Trade Dynamics
Russia exports approximately 2.0 million barrels of oil per day to China, making up more than one-third of its overall crude oil exports. China stands as Russia’s second-largest purchaser of oil, following India. Roughly 40% of the oil supply is transported through the 4,070-km (2,540-mile) East Siberia Pacific Ocean (ESPO) pipeline, which was funded by Chinese loans estimated at around $50 billion.
Data provided by Vortexa and Kpler suggest that from January to September, Russia shipped 1.3 million bpd of seaborne crude. Additionally, according to sources in Chinese trade, China imported approximately 800,000 bpd of ESPO crude through the pipeline. The seaborne imports primarily comprise ESPO dispatched from Russia’s Pacific port of Kozmino and Urals from the Baltic Sea.
Vortexa’s tanker tracker indicates that between January and September, the total Russian deliveries surged by more than 400,000 bpd compared to the previous year, with the Urals leading the charge. Reuters’ analysis of the monthly price differentials between ESPO and Tupi crude from Brazil, as well as the Urals versus Oman, based on information provided by traders, suggests that China has saved $4.34 billion this year through its imports of Russian oil.
Shifting Sino-Russian Gas Dynamics
Anticipated forecasts from the Russian state bank VEB suggest a substantial decline in Russia’s pipeline natural gas exports to the European Union, projected to drop to 21 billion cubic meters (bcm) this year. This figure represents a significant decrease of almost two-thirds compared to the previous year and a more than six-fold reduction from 2021. Conversely, estimates indicate that 22 bcm are expected to be delivered to China via the Power of Siberia pipeline in the same period. Consequently, for the first time, Russia’s gas exports to China will surpass those to Europe.
The principal gas export channel for Russia, the 4,000-km (2,500-mile) Power of Siberia pipeline, connects the East Siberian fields to northeastern China. Since its initiation in late 2019, gas supplies through this pipeline, which is distinct from the network of westbound Russian gas pipelines, are scheduled to increase to 38 bcm annually by 2025 under a lucrative 30-year contract valued at over $400 billion. Russia has proposed the development of a second gas pipeline to China, the Power of Siberia 2, intended to transit through Mongolia with a capacity of 50 bcm per year. Nonetheless, negotiations concerning pricing and other pertinent aspects of the route have yet to yield concrete results.
During President Vladimir Putin’s previous visit to China, a 30-year contract was secured for the supply of 10 billion cubic meters of gas annually via a new pipeline from the Russian island of Sakhalin. Additionally, Russia’s Novatek has aspirations to challenge Qatar as the world’s foremost LNG producer in the forthcoming decades, with investments from Chinese companies such as CNPC in projects like Yamal LNG and Arctic LNG-2. Furthermore, Russia may potentially export up to 10 million tons of liquefied natural gas to China this year, contributing to the total of 33 million tons of LNG produced in Russia.
Geopolitical Disruption and Energy Shifts
The upheaval caused by the Ukraine conflict marked a significant disruption in the growth trajectory of major economies, particularly those within the global south, such as China and India. These economies, poised to outpace several advanced counterparts, encountered a formidable setback, largely attributed to the ramifications of the conflict. Notably, the emergence of the China-Russia Strategic Partnership amid the chaos of the conflict played a transformative role, precipitating an unprecedented surge in the influx of Russian crude imports and consequently altering the equilibrium of energy market dynamics.
This shift in the energy trade dynamics, exemplified by the growing cooperation between Russia and select countries in the global south, is poised to set a new precedent in international energy relations. As these developing economies witness the successful navigation of supply chain disruptions and the establishment of stable and viable pricing structures for Russian crude, they may be encouraged to explore similar partnerships to bolster their own economic development.
Moreover, the ripple effects of this strategic shift have the potential to reshape the face of the global south, catalysing a reevaluation of traditional trade routes and forging new paths for sustainable economic growth. With increased accessibility to reliable energy sources and the establishment of mutually beneficial trade relationships, these developing economies could witness a surge in industrial and infrastructural development, contributing to a more diversified and robust global economic landscape.
Simultaneously, the recalibration of Sino-Russian gas trade dynamics represented a pivotal juncture, with projections indicating that Russia’s gas exports to China would soon surpass those directed towards the European Union, marking a notable shift in the traditional energy supply routes.
Over the years, China has been a major purchaser of oil and gas resources sourced from the Middle East. However, recent developments indicate a shift in strategy, with Chinese firms now increasingly investing in key segments of the energy infrastructure. In February 2023, the state-owned China Petroleum & Chemical Corp., also known as Sinopec, secured a 1.25% stake in a Qatari gas field as part of a massive liquefied natural gas project valued at $30 billion. This acquisition marked a significant move for China, particularly as it represented a sizable share of the country’s annual LNG imports.
The momentum continued with the signing of a historic 27-year agreement between China and QatarEnergy, facilitating the supply of 4 million tons of LNG annually to China. This landmark deal not only solidified China’s position as a major player in the global LNG market but also marked the longest-ever agreement for Qatar, a key global exporter of natural gas. China demonstrated its growing economic influence by executing the first yuan-settled energy transaction involving Emirati liquefied natural gas in March 2023, further diversifying its LNG import portfolio.
Concurrently, the China National Petroleum Corp. (CNPC) has been engaged in negotiations aimed at reducing the pricing of gas supply under the proposed Power of Siberia 2 pipeline deal with Russia. This pivotal agreement, which has been under discussion for nearly two decades, is expected to open a crucial conduit for the supply of Russian natural gas into northern China. If successfully realised, this deal has the potential to become one of the most substantial cross-border energy agreements signed by a Chinese state oil and gas enterprise in recent history.
The complexities of the Ukraine conflict and the subsequent energy trade developments between Russia and China have unfolded a narrative that diverges from the initial expectations. Despite geopolitical tensions and disruptions, the strategic partnership between China and Russia has solidified, leading to a profound transformation in the global energy market dynamics.
– Syed Raiyan Amir is a Research Associate at the KRF Center for Bangladesh and Global Affairs (CBGA).
Published in The Financial Express [Link]