On 8 January, China reopened its borders after almost three years of self-isolation due to the continuous COVID-19 waves. An event that Laura M Cha, Chairman of Hong Kong Exchanges and Clearing Limited (HKEX) defined as “a major event of 2023 and a key driver for growth.”
A growth that could be even more than was predicted, as shown by the experiences of Western economies when they lifted the COVID-19 restrictions. And for Ms Cha, it is going to be a very positive growth, not only in China but in the whole Asian continent. While speaking at the World Economic Forum in Davos, she recalled that Asia’s GDP accounted for 20 per cent of the global one in 2010, then up to 35 per cent in 2020 and it is now expected to grow up to 45 per cent by 2027 (as estimated by the International Monetary Fund). Therefore, according to her, while some economies won’t be able to avoid the economic recession that is coming, coupled with higher inflation, the real growth will be in China and in Asia.
A recovery of China’s LNG imports will limit the LNG volumes available for Europe
So, what does this mean for the energy market?
A strong recovery of China will mean more competition for liquified natural gas (LNG), whose imports Europe has been relying a lot on, especially since its efforts to diversify its supply sources. In fact, as recalled also by the International Energy Agency (IEA), Europe’s ability to secure higher LNG imports in 2022 was enabled in large part by lower import demand from China, which declined by 20 per cent (or over 20 billion cubic metres, bcm) from 2021 levels. If China’s LNG imports recover to their 2021 levels, it would capture most of the overall increase in global LNG supply in 2023 and limit the LNG volumes available to the European market.
Anne-Sophie Corbeau, Global Research Scholar at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs agrees that this is one of the key concerns for Europe.
“China has moved from a 0 Covid policy to dealing with Covid full time, as we were a couple of years ago,” she tells CEENERGYNEWS. “But eventually, they will get out of this difficult situation, the economy will start again, industries will need energy to resume their normal activities and consumption from all energy sources will increase again.”
What would be the role of gas in that recovery, according to her, depends on different factors.
“First, the weather, including episodes of cold weather (more heating in residential), heat waves (more AC), but also droughts which usually call for more gas-fired generation use. China has seen quite a few droughts over the past few years,” Ms Corbeau says. “Then there is the role of coal. And finally, how expensive will be gas, in particular LNG. In 2021, China was the largest LNG importer. Over 2022, two things happened: spot LNG was expensive, but also given the decline in Chinese LNG demand, many companies were happily reselling the LNG at a profit to Europeans. So their LNG imports dropped by about 20 per cent.”
She goes on by highlighting how LNG tends to be more expensive than other sources of gas, including domestic gas, Russian gas and Central Asian gas, especially if it’s coming from the spot market.
“A key concern for Europe is that China has contracted a lot of LNG over the past two years*,” she points out. “Some of the LNG had been contracted as soon as 2022-23 so if China needs the LNG, they will use it and it will be cheaper than spot LNG which has been around 30 US dollars/million British thermal unit (mmBtu).”
The unattractiveness of European markets
What will make Europe less attractive?
“This is precisely around those long-term contracts,” replies Ms Corbeau. “If China wants/needs the LNG, then it can import it because it has been contracted.”
According to the commentary written by Ms Corbeau and Sheng Yan, a non-resident Fellow at the Center on Global Energy Policy, China has traditionally relied on a mix of spot and short-term contracts. However, in 2021, China’s LNG-contracting activity surged with 20 new contracts, including 15 in the second half of the year. These contracts amounted to 38 bcm of LNG and have a duration of 10 to 20 years, indicating that the companies buying the LNG see a long-term need for the product. China’s robust contracting activity has continued in 2022, with nine long-term contracts signed as of late August, eight of which are at least 20 years in duration.
“The estimates I have for Chinese LNG imports in 2022 are around 85 bcm and they have long-term contracts corresponding to 91 bcm (assuming that all new contracts start on 1 January, which may not always be the case),” Ms Corbeau continues, noting that if they need some extra gas, they might be able to get it because overall the price of one expensive cargo could be diluted within cheaper LNG by large companies.
“Smaller companies would have more difficulties to pass through the cost of one expensive cargo if they don’t import so much,” she concludes. “It also depends on whom they are reselling.”
China’s reopening and its effects on the oil industry
Moving to the oil industry, Russia will have a larger role to play. Currently, China buys a fifth of the world’s oil and in 2022 it increased imports of Russian oil from about 1.6 Million barrels per day (mb/d) to close to 2 mb/d. Also, India has increased Russian crude oil purchases from 0.1 mb/d to 1 mb/d and smaller Asian importers may also choose to import some Russian crude oil.
It is going to be more complicated for Russia to cease natural gas exports to Europe to focus on the Asian market because not only China’s importing capacity is limited, but the country is also focusing more on renewables and electrification, thus decreasing the demand for natural gas. However, it might be actually the case for oil exports, also if we think about the sanctions that are currently in place in the EU and the embargoes on Russian oil.
According to the IEA, a complete cessation of Russian crude oil imports by the EU would mean that it needs to find around 1.6 mb/d of crude oil from alternative sources in addition to volumes that have already been replaced.
Thus, the energy crisis seems to only accelerate in 2023 for Europe, with the reopening of China being a major factor. On one hand, we see more Russian oil going to Asia (and less to Europe); on the other hand, also more LNG imports from different sources (and again, less to Europe). Of course, geopolitics is not something easy to predict, especially nowadays with so many players in the game and so much at stake. So, how much the reopening of China will impact Europe”s energy market, is another thing to watch in 2023.
*The commentary is fairly up to date but misses the 4 mtpa contract between Sinopec and QatarEnergy.
