Chinese Dragon Wants to Control the Global LNG market

The goal set by Beijing is to achieve complete or near-complete energy independence of China in the first half of the 21st century. The country is increasing imports of natural gas, liquefied gas, and oil. A dozen new LNG sorting terminals are being built along China’s coast. A tug-of-war for controlling the global LNG market is going on between China, on the one hand, and Europe and Japan, on the other.

President Xi Jinping’s government is urging China’s state-owned energy companies to increase energy imports in all forms, from oil to natural gas and liquefied natural gas (LNG). Chinese imports are growing regardless of the global energy situation. In addition to importing energy raw materials, China is trying to strengthen its control over production sites abroad, increasing investment not only in hydrocarbon production, but also in the technical and technological modernization of the corresponding export infrastructures in producing countries.

This economic and financial policy reflects the strategic goal set forth by the Chinese Communist Party to “achieve complete or near-complete energy independence for China by 2050.”

According to a recent analysis by Bloomberg, China currently has the largest number of long-term LNG import contracts. China holds this record for the third year in a row, and by the end of 2023, the country is expected to become the world’s top LNG importer. Price stability is the main advantage that long-term contracts offer Chinese importers.

“Energy security has always been one of the strategic objectives of the Chinese authorities. A large number of already signed contracts allows Chinese importers not to worry about possible market volatility in the future. I believe this trend will continue,” said Toby Kopson, managing director of the Hong Kong trading company Trident LNG.

In fact, according to the results of the first half of this year, China accumulated 33% of all world LNG supplies covered by long-term contracts. Last month, China National Petroleum Corp. signed a 27-year contract with Qatar Energy for the supply of liquefied natural gas and also acquired a stake in a project providing for a significant increase in hydrocarbon production at the North field in Perch Bay. To diversify supply sources, another Chinese company, Enn Energy Holdings Ltd., signed a long-term contract with the American company Cheniere Energy Inc. The start of deliveries under both agreements is expected by 2026.

To ensure stable energy flows to the Chinese industry, more than ten fundamentally new terminals for unloading, regasification, and subsequent sorting of liquefied gas will be built along the coasts in the coming years. According to the Norwegian consulting company Rystad Energy, “By 2033, China’s LNG imports will reach 133 million tons per year, or double the current situation.”

In May 2023, China also significantly expanded its imports of liquefied natural gas from Russia, which increased by 2.3 times compared to the corresponding period of 2022, and reached 930.7 thousand tons. In the first five months of the year, Russian LNG exports to China increased by 67% and amounted to more than three million tons. In monetary terms, the cost of Russian LNG supplied to China increased in May year-on-year by 22.8% to $540 million, while in the period January-May 2023, the increase was 25.2% ($2.2 billion). Presently, large-tonnage liquefied natural gas intended for export is produced in Russia by Sakhalin Energy (a joint project of Gazprom, Mitsui, and Mitsubishi) and Yamal SPG (Novatek, TotalEnergies, Sprs, and a Chinese company Srf).

In addition to liquefied gas, China is increasing its natural gas imports through its pipeline network. There are currently five supplier countries: Russia, Turkmenistan, Uzbekistan, Kazakhstan, and Myanmar. In 2019, a new main Russian-Chinese gas pipeline “Power of Siberia” over 3,000 km long was put into operation, connecting the Kovykta field in the southeast of Siberia and Chadzhanda in the northeast of Siberia, continuing east, to China. The pipeline allows exporting 38 billion cubic meters of Russian natural gas to China annually.

Oil and gas imports to China are growing year by year

According to Chinese customs data, in 2022, Russia was the second (after Saudi Arabia) largest supplier of crude oil and the fourth (after Australia, Qatar, and Malaysia) largest supplier of LNG to China. Last year, Saudi Arabia exported 87.48 million tons of crude oil to China (-0.1% compared to 2021), and Russia sold 86.24 million tons to China (+8.2% from 2021) for a total of $58.37 billion (+43.9%). China’s ambitions to dominate the global LNG market cannot but worry Europe and Japan, which re-signed a Memorandum of Cooperation in 2017 with the clear intention to promote “global, liquid, flexible, and transparent” LNG exchanges.

When it comes to energy, anti-Russian sanctions don’t work. At least, not for Japan.

In recent years, Japan has also become one of the largest and “most militant” – according to Il Sole 24 Ore  – LNG consumers in the world. In order to keep Russian sources of liquefied gas, on May 30, Tokyo excluded from sanctions the projects in Russia “related to the storage, exploration, production of oil, gas, and liquefied natural gas.” Firstly, the alleviation of anti-Russian sanctions policy by Japan concerns three projects in the Russian Far East: Sakhalin-1 controlled by Rosneft, Sakhalin-2 (Gazprom), and Arctic Spg2 (Novatek). And this is because the Japanese consortium Sodeco consisting of Japex, Itochu, Marubeni, and Inpex controls 30% of Sakhalin-1, while Mitsui and Mitsubishi control 12.5% and 10%, respectively, of the Russian Sakhalin-2 project. Other Japanese companies control 10% of the Arctic Spg2 project built by Russian multibillionaire and Novatek president Leonid Mikhelson.

“Given the impact (of sanctions – ed.) on Japanese companies present in Russia, the necessary measures were taken to ensure the stable operation of projects important for Japan’s energy security,” the Ministry of Economy of the land of the rising sun said in a statement.

Japan is one of the largest consumers of liquefied natural gas in the world – in 2022, 9% of the total LNG volume was supplied to Japan by Russia. In May 2023, Russian LNG sales to this Asian country grew again by 9.1%, after which the share of Russian LNG in Japan’s imports increased to 13.22% of the total volume.

Unlike the American Exxon and the British-Dutch Shell that in 2022 withdrew from projects in Russia, Japanese companies decided to maintain their presence in the strategic projects Sakhalin-1, Sakhalin-2, and Arctic Spg2.

In March, Japanese Prime Minister Fumio Kishida said that “Japan will continue to participate in projects in Russia, as demand for LNG in the country is expected to continue to grow.”