Russia could sell more energy to Asia, but has to slash prices

Global energy leaders are betting that Russia can find a way to export at least the oil and the coal, in large part because global demand remains high
Last Updated 03 May 2022, 17:02 IST

Last year, the Grand Aniva, a Russian tanker with four spherical tanks for holding ultracold liquefied natural gas, sailed back and forth between a gas field in eastern Russia and depots in Japan and Taiwan. But two days after Russia invaded Ukraine, the ship switched routes, sailing to China instead.

The voyages of the tanker, which is as long as three football fields, underlined that President Vladimir Putin of Russia can still find buyers in Asia for his country’s fossil fuel exports despite Western sanctions. He needs to look for buyers as governments exact more pressure on his country to try to stop its war in Ukraine, including an expected move in the next several days by the European Union to gradually halt imports of Russian oil.

Putin called on April 14 for his country “to redirect our exports gradually to the rapidly growing markets of the South and the East.” Two obvious destinations are China, the world’s largest energy market, and India, the world’s third largest. (The United States is No. 2 in energy use.)

But any attempt to shift Russia’s energy exports to Asia from Europe would face major obstacles. Russia would need to offer steep discounts to make its oil and coal exports worth the risk and cost to buyers, and would need to start the yearslong task of building more ports and pipelines for natural gas exports.

Redirecting Russian natural gas to Asia from Europe would require building extremely long pipelines or specialized ports like the one on Russia’s Sakhalin Island from which the Grand Aniva sails. Such ports are able to supercool natural gas so that it condenses into a liquid, which can then be sent by ship.

Sending oil to Asia would also require transportation by ship. But because of Western financial sanctions over the war in Ukraine, insurers are refusing to cover tankers with Russian cargoes. Banks are refusing to lend money for the time that the oil is in transit. So oil companies in countries like India have demanded very steep discounts on the price to cover the extra cost and risks.

Exports of coal, which can be loaded on trucks or trains to China, face the fewest logistical obstacles. But Russia’s coal exports are worth only a tenth as much as its oil exports and a quarter as much as its natural gas exports, data from Russia’s Federal Customs Service shows. And Western sanctions on using dollars for transactions with Russia are dampening Chinese demand for Russian coal.

“Even the private Chinese coal traders these days don’t want to touch Russian coal, because of the fear of Western sanctions,” said Zhou Xizhou, a longtime specialist in Chinese energy who is now at S&P Global.

Despite the obstacles, global energy leaders are betting that Russia can find a way to export at least the oil and the coal, in large part because global demand remains high. The world has been short of energy since fall, when China nearly ran out of coal and suffered widespread electricity blackouts.

Prices have risen sharply since last year for natural gas and oil as well as coal. Preventing any Russian energy from reaching world markets could drive them even higher.

“This is actually potentially a more significant energy crisis than the 1970s — that was just oil, it was simpler,” said Daniel Yergin, an energy historian and author of books such as “The Prize” and “The New Map.”

Some energy industry leaders are calling for policies that do not block Russian energy exports entirely. The goal instead should be to make it very hard for Russia to export, they say, so that it does so only at very low prices.

“The main issue is not to reduce or nullify Russian exports to Europe, but to reduce the Russian oil and gas revenues — they are not the same thing,” said Fatih Birol, executive director of the International Energy Agency in Paris.

The expectation is that Putin will keep the oil and coal moving by holding, in effect, the world’s biggest sale.

Russia needs every dollar of export revenue it can get right now. It is lurching toward default on its foreign debt. It has lost much of its foreign investment. And Western governments have frozen half of its central bank’s foreign reserves.

Russia currently exports nearly 5 million barrels per day of crude oil and another 3 million barrels per day of diesel, gasoline and other refined products. China and India have extensive refinery industries and are typically interested in the crude oil, Birol said.

Natural gas is harder for Russia to export. According to the International Energy Agency, Russia has the capacity to liquefy and load onto ships only about a tenth of its natural gas exports. Most of the shipments that are liquefied have already been going to East Asia anyway, with a lot leaving from the southern tip of Sakhalin Island, near Japan.

According to Marine Traffic, an Athens, Greece-based ship tracking service that monitors ships’ locations, the Grand Aniva switched from supplying Japan and Taiwan last year to supplying China in the two months since the Russian invasion.

The Grand Aniva is one of the few tankers still visiting Russian ports: It is owned by Sovcomflot, a state-owned Russian shipping company that is already the target of Western sanctions.

On its most recent voyage in mid-April, the Grand Aniva went from Sakhalin Island to an LNG unloading port in Beihai, on China’s southern coast. Sinopec, a state-owned Chinese refining giant, built the port and then transferred it three years ago to PipeChina, a separate state-owned enterprise. Sinopec, PipeChina and Sovcomflot did not respond to requests for comment.

Geopolitics help make possible the continued export of Russian energy. China has avoided condemning Russia’s invasion of Ukraine and has a history of buying oil from Iran and Venezuela despite Western sanctions on those countries.

“The Chinese have found workarounds for Iranian oil, for Venezuelan oil,” said Michal Meidan, director of gas research and China energy at the Oxford Institute for Energy Studies. “They will find workarounds for Russian oil.”

Russia is already increasing natural gas shipments to China through a recently completed Siberian pipeline. But because Russia’s Siberian gas fields are not linked by pipelines to Russian gas fields supplying Europe, there are severe limits on Russia’s ability to shift gas sales to China.

Still, trade between Russia and China, much of it Russian energy exports, jumped nearly 30% in the first three months of this year compared with a year earlier. That increase “fully demonstrates the great resilience and internal dynamism of cooperation between the two countries,” Le Yucheng, a Chinese deputy foreign minister, said in a statement last month. “No matter how the international situation changes, China will, as always, strengthen strategic coordination with Russia.”

Russia’s market position might improve in the fall. Much of Russia’s oil is very heavy, producing extra diesel when refined. Russia exported more than 10 times as much diesel as gasoline last year, data from Russia’s Federal Customs Service shows.

The world’s main diesel market is China, with nearly twice as many heavy-duty trucks in operation as the United States. Coronavirus lockdowns have paralyzed much of China’s fleet in recent days, especially in and around Shanghai.

Diesel demand in China could completely reverse by fall. Beijing is turning to its favorite tactic in previous economic slowdowns: enormous investment in the construction of more rail lines, roads, bridges and other infrastructure.

All of that construction will require huge fleets of diesel-guzzling trucks, excavators, pile drivers, bulldozers and other equipment.

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(Published 03 May 2022, 16:58 IST)

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