The Surprising Impact of Ukraine’s War on China’s Energy Outlook

The ongoing Ukraine conflict has had a significant impact on the global energy market as it enters its second year with no end in sight. This has led to strained oil and gas markets, a de-emphasis on climate goals, and a re-evaluation of long-standing supply relationships. The European Union’s historically high consumption of Russia’s energy exports has decreased due to Brussels’ efforts to diversify supply and Moscow’s decision to cut natural gas pipeline flows. While the United States and the Middle East have seen gains in energy exportation, households and businesses worldwide have been adversely affected by high energy prices. The long-term impact of the conflict on China, the largest energy importer, and consumer globally, remains uncertain.

China’s oil supply security has been improved in the short term due to the war, as Chinese refineries have been able to purchase Russian crude at a discounted rate, says Erica Downs, a senior research scholar at Columbia University. She adds that the war has also increased China’s importance as a market for Russian hydrocarbons, potentially giving it leverage in future supply contract negotiations. However, China’s heavy reliance on imports and trade with Russia leaves it exposed, particularly as global energy markets become more politicized. In recent years, China has imported over 70% of its crude oil and over 40% of its natural gas. Crude oil accounts for half of China’s imports from Russia, and last year, Russian crude imports increased by 8% in volume and 44% in US dollar terms, driven by soaring energy prices due to the conflict in Ukraine.

Kang Wu, who heads Global Demand and Asia Analytics at S&P Global Commodity Insights, stated that China has not benefited much from the war due to price spikes, higher inflation, and elevated interest rates. Wu explained that China pays more for imported oil due to higher prices, while Russia receives less for every barrel of oil sold because of deep discounts. However, Wu noted that China has mitigated economic risks by importing more Russian crude at lower prices, but a stable oil market without geopolitical conflict would be better. A report published in January by Energy Intelligence, a leading energy information company, states that security and affordability are priorities for the global energy industry in 2023, with the outlook still uncertain due to geopolitical turmoil. The report also mentions that China could be more cautious but may step up its imports of Russian oil, while re-routing Russian gas flows will be harder and time-consuming, requiring new infrastructure and an appetite from Asian countries, especially China.

According to the report, the global energy crisis is expected to strengthen the ties between China and Russia. However, a Chinese energy expert named Wang Nengquan believes that China has learned from Europe’s experience and knows that it should not rely too heavily on a single country for its energy needs. Wang emphasizes that international relationships are based solely on interests, not on friendship and that they can change at any time. In 2021, Russia was the second largest supplier of oil to China, accounting for 16.9% of total imports, an increase of 1.4% from the previous year. Despite this, Chinese authorities and companies are taking a cautious approach when it comes to entering into new long-term energy and investment agreements with Russia due to the ongoing conflict in Ukraine, according to Downs.

The speaker stated that there is no agreement in place for the Power of Siberia 2 pipeline and Chinese companies have not purchased assets in the Russian upstream. Gazprom, a Russian state-controlled gas company, plans to construct the Power of Siberia 2 pipeline to supply northern China with 50 billion cubic meters of gas annually through Mongolia, with construction starting in 2024. Currently, Russia is the second-largest pipeline gas supplier to China after Turkmenistan, primarily through the China-Russia East-Route pipeline. The agreement between China National Petroleum Corporation and Gazprom to supply gas via the pipeline, signed in 2014, was valued at $400 billion over 30 years. In September 2020, China and Russia announced their intention to use roubles and yuan for payment to avoid Western pressure.

Elizabeth Wishnick, a senior research scientist at CNA, has suggested that Chinese officials tend to see land-based energy deliveries as more reliable, but they may be hesitant to agree to a new gas pipeline from Russia. She explained that experts in the field believe China may not require additional gas supplies in the short term, as it plans to expand deliveries from Turkmenistan. Furthermore, she noted that China has always harbored doubts about the security of pipelines that transit third countries, as the proposed Power of Siberia 2 pipeline would do, passing through Mongolia. Although Russian President Vladimir Putin is hoping to agree on a deal during an expected visit by Chinese President Xi Jinping to Moscow, Wishnick pointed out that Xi has not yet approved the new pipeline, and that China may not want to be overly reliant on an unpredictable leadership in Russia, despite the strength of the Sino-Russian strategic partnership. Although Russian energy products have increased their flow to China, imports from other major suppliers have remained constant.

According to experts, the supply of oil and gas from sources such as Saudi Arabia, Qatar, and the United States is expected to increase as Chinese firms sign new long-term contracts. He Weiwen, a senior fellow at the Centre for China and Globalisation, believes that it is Russia’s need for increased Chinese purchases of natural gas, rather than China’s need, that is driving this trend. While China’s energy imports may face more scrutiny in the future, logistical and technical challenges will likely prevent major political changes in the short term, according to Zha Daojiong, a professor at Peking University. He added that switching to different crude oil sources can disrupt refining processes and affect profit margins, while importers must also consider contractual obligations and transportation costs.

According to Zha, even if China aimed to substitute energy imports from Russia with similar quantities from other nations – even those that impose sanctions on Moscow – there could be negative political consequences. He suggested that an economy relying heavily on exporting energy would face higher domestic energy prices due to substantial growth in exports. Despite this, experts stated that China would bear some diplomatic repercussions in its connections with countries like the US and Europe if it persists in purchasing low-cost energy from Russia. Kung Chan, the founder of the think tank Anbound, expressed that few people can conduct business without considering shared values and that the idea that “business is business” is no longer relevant.