Trumped up gains

Sinopec can thank him

The invasion of Ukraine is creating unprecedented strains in the European market for natural gas, where countries like Germany, Austria and Hungary are coming under huge pressure to reduce their imports from Russia.

“Buying Russian oil and gas is financing war crimes. Dear EU friends, pull the plug. Don’t be an accomplice,” the Lithuanian foreign minister urged on Sunday, after his country called a complete halt on gas purchases from Russia.

Other buyers are seeing opportunity amid the tension, with a report in Bloomberg this week that China’s leading importers of liquefied natural gas (LNG) are trying to purchase additional shipments from Russia.

Russian LNG is trading at a discount of more than 10% to normal North Asia shipments on the spot market on concerns about potential sanctions or reputational damage in committing to Russian deliveries. Chinese firms have emerged as some of the only companies ready to take that risk, the news agency claims.

Other Chinese energy producers have been profiting from the situation in a different way, however, in a story that goes back to 2018, when Donald Trump was ramping up the pressure on the Chinese government with trade tariffs. A partial truce was struck between the two governments that year when Beijing agreed to buy more American exports, with both sides settling on energy as one of the less politically contentious candidates.

Thanks to the shale gas revolution, the US has been the world’s biggest natural gas producer since 2013, while China’s northeastern provinces have often suffered from LNG shortages, especially in the winter.  So the two countries signed off on a slew of energy agreements, including a 20-year deal in which Chinese firms such as Sinopec undertook to buy more LNG from American producers. Most of the financial details in these agreements have stayed undisclosed. But a trading unit of Sinopec’s called Unipec has just made a hefty profit from the deal to buy the American LNG by reselling at least three of its LNG cargoes for delivery to ports in Europe this summer.

The LNG sales soon became the most-discussed energy market news in Chinese social media. European natural gas rates have surged to record highs, because of the military conflict in Ukraine. In early March, LNG was trading at $3,800 per 1,000 cubic metres in the European futures market, according to a widely-followed WeChat blog that spurred much of the social media debate on the story. Meanwhile spot prices were hovering above $2,400. This compared with Sinopec’s contract costs for the American gas that were (at most) about $400, the blog reckoned, given that Chinese firms had been buying Russian LNG for about $350 in contracts signed at a similar time. Hence the three cargoes of LNG from Louisiana have cost Sinopec about $240 million (before shipping expenses, admittedly, which have been soaring) but it is estimated by the same blogger they could have been sold in Europe for more than $1 billion.

Similar cross-Atlantic trade by   Chinese firms might occur more if European countries choose to buy alternative LNG imports to boycott Russia. Indeed, energy data provider Platts reported in January that Unipec had issued tenders to sell up to 45 LNG cargoes from February to October into northwestern Europe.

Of course, the trading window could still slam shut as the political situation changes. As tensions grow over how to respond to the conflict, the Chinese may choose to reduce their own purchases from Russia, for instance, perhaps in response to the threat of potential sanctions from Western governments.

In that event, supply from American producers is going to be looked at differently again in what could become an even more complex equation.

But for the time being, Chinese firms like Sinopec are happy to make the most of the situation by locking in some unexpected profits on a deal that its government probably wasn’t too excited about signing in the first place. “China has always been an LNG importer. It would have been unimaginable for us previously to take on such a trading role,” the aforementioned blogger concluded. “We owe a big thank you to the pressure from the US.”

Or more specifically Donald Trump…

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.