Russia Could Increase Energy Sales to Asia but Must Cut Prices

by Wall Street Rebel | Michael London | 05/03/2022 1:17 PM
Russia Could Increase Energy Sales to Asia but Must Cut Prices

Russia wants to export more oil and coal to China and India, but Western sanctions may make that problematic unless Russia gives substantial reductions on the price of the commodities.


President Vladimir Putin urged his country in April to "gradually divert our exports to the rapidly developing markets of the South and East." China, the world's largest energy market, and India, the world's third-largest, are two obvious targets.

However, any move to transfer Russia's energy exports from Europe to Asia would encounter significant challenges. To make its oil and coal exports worth the risk and expense to purchasers, Russia would need to provide severe discounts, and it would need to begin the years-long work of developing new ports and pipelines for natural gas exports.

Redirecting Russian natural gas from Europe to Asia would necessitate the construction of extraordinarily long pipelines or specialized ports, such as the one on Russia's Sakhalin Island from which the Grand Aniva sails. Such ports may supercool natural gas, causing it to condense into a liquid that can subsequently be shipped by ship.

Shipping oil to Asia would also necessitate the use of a ship. However, due to Western financial restrictions imposed due to the Ukraine conflict, insurers are refusing to insure tankers carrying Russian cargo. Banks are refusing to provide money until the oil is being transported. As a result, oil corporations in nations such as India have requested very high price cuts to cover the additional costs and risks.

Coal exports to China, which can be transported on trucks or trains, encounter the fewest logistical challenges. However, according to Russia's Federal Customs Service statistics, Russia's coal exports are barely a tenth of the value of its oil exports and a fifth of the value of its natural gas exports. Furthermore, Western restrictions prohibiting the use of dollars in dealings with Russia are lowering Chinese demand for Russian coal.

"Even private Chinese coal dealers these days don't want to touch Russian coal because they're afraid of Western sanctions," said Zhou Xizhou, a long-time specialist in Chinese energy who now works at S&P Global.

Despite the challenges, global energy officials are banking that Russia will be able to export at least the oil and coal, owing to significant worldwide demand. Since October, when China nearly ran out of coal and saw major power outages, the globe has been running low on energy.

Natural gas, oil, and coal prices have climbed dramatically since last year. Preventing any Russian energy from accessing global markets may raise prices much further.

"This might be a more catastrophic energy catastrophe than the 1970s — it was simply oil; it was easier," said Daniel Yergin, an energy historian and author of books such as "The Prize" and "The New Map."

Some energy business professionals advocate for rules that do not entirely obstruct Russian energy exports. They argue that the objective should be to make it exceedingly difficult for Russia to export, such that it only does so at very cheap costs.

"The fundamental objective is not to decrease or eliminate Russian shipments to Europe, but to diminish Russian oil and gas income – they are not the same thing," Fatih Birol, executive director of the International Energy Agency in Paris, told Reuters by phone.

Mr. Putin is expected to keep the oil and coal markets moving by hosting the world's largest auction.

Right now, Russia requires every dollar of export earnings it can obtain. It is on the verge of defaulting on its international debt. It has lost a large portion of its foreign investment. Furthermore, Western governments have frozen half of their central banks' foreign reserves.

Russia presently exports approximately five million barrels of crude oil per day and another three million barrels of diesel, gasoline, and other refined goods per day. Mr. Birol stated that China and India have substantial refinery sectors and are normally interested in crude oil.

Russia is finding it more challenging to export natural gas. According to the International Energy Agency, Russia can liquefy and load just about a tenth of its natural gas exports aboard ships. Most of the liquefied supplies were already headed to East Asia, with several departing from the southern point of Sakhalin Island, near Japan.

According to Marine Traffic, an Athens-based ship monitoring service that tracks ship whereabouts, the Grand Aniva moved from serving Japan and Taiwan to providing China in the two months following the Russian invasion.

The Grand Aniva is one of the few tankers that continues to visit Russian ports: It is controlled by Sovcomflot, a Russian state-owned maritime firm that the West already sanctions.

In mid-April, the Grand Aniva's most recent journey took it from Sakhalin Island to an L.N.G. unloading port at Beihai, on China's southern coast. Three years ago, Sinopec, a state-owned Chinese refining conglomerate, developed the port before handing it over to PipeChina, a different state-owned firm. Requests for a response from Sinopec, PipeChina, and Sovcomflot went unanswered.

Geopolitics contributes to Russia's ability to continue exporting energy. China has refrained from criticizing Russia's invasion of Ukraine and has a history of purchasing oil from Iran and Venezuela despite Western sanctions against those nations.

Russia has already increased natural gas exports to China via a recently built Siberian pipeline. However, because pipelines do not link Russia's Siberian gas reserves to Russian gas fields supplying Europe, Russia's capacity to transfer gas shipments to China is severely limited.

Nonetheless, commerce between Russia and China increased by about 30% in the first three months of this year compared to the same period last year, with Russian energy exports accounting for the majority of the increase. In a statement last month, this increase "fully demonstrates the two countries' great resilience and internal dynamism," said Le Yucheng, China's deputy foreign minister. "Regardless of how the international situation evolves, China will continue to increase strategic coordination with Russia."

In the autumn, Russia's market position may improve. Because much of Russia's oil is heavy, it produces additional diesel when processed. According to Russia's Federal Customs Service, Russia exported more than ten times as much diesel as gasoline last year.

China is the world's largest diesel market, with nearly twice as many heavy-duty vehicles on the road as the United States. Coronavirus lockdowns have rendered much of China's fleet inoperable in recent days, particularly in and around Shanghai.

China's diesel consumption might entirely reverse by September. Beijing is reverting to a strategy that has served it well in previous economic downturns: massive investment in the building of new train lines, roads, bridges, and other infrastructure.


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