Vita Spivak
The energy crisis shows that the “green transition” in China will generate many more controversies. On the one hand, Beijing needs to ensure the country’s energy security by purchasing more coal. On the other hand, to reduce dependence on coal energy by switching to gas. But for Russian energy exporters, both the first and second trends open up new opportunities.
While the world is discussing the unprecedented rise in gas prices in Europe, an energy crisis is unfolding on the other side of the Russian borders. At the end of September, the Chinese authorities turned to the Russian Inter RAO with a request to increase the supply of electricity to the PRC. Due to the acute shortage of electricity in some provinces of China, it is actually necessary to introduce a rationing system for its consumption.
The reason for the shortage is the desire of the regional leadership to keep up with the indicators lowered from the top to reduce emissions of CO2 and other greenhouse gases. A year ago, Xi Jinping pledged that the country would achieve carbon neutrality by 2060, and coal-fired power plants, which still play an important role in China’s energy balance, were the first to be hit.
So the “green transition” will change the working conditions for Russian exporters of hydrocarbons not only in the European, but also in the Chinese market. However, in the case of China, it creates more opportunities than difficulties.
Electricity by cards
In the past few weeks, 19 large provinces in the PRC have begun to ration their electricity consumption. And so harsh that some consumers had to do without it for up to 10 days in a row. Even some residential areas were affected by restrictions, and energy-intensive industries (metals, cement, chemicals) were hit almost everywhere.
The current crisis has three main reasons. First, against the backdrop of the post-coronavirus recovery, energy prices have skyrocketed in global markets, including coal, which is still the main fuel for power plants in China. The rise in prices coincided with a fall in domestic production: in recent years, the authorities have closed many coal mines due to stricter environmental requirements.
Secondly, by the end of the third quarter of 2021, many Chinese provinces realized that they were not able to fulfill the environmental recommendations released from the center. Therefore, they rushed to reduce emissions in the most radical way – for example, to demand from enterprises to limit energy consumption. In some cities, shopping centers began to open half an hour later, and the opening hours for energy-intensive industries were reduced.
Thirdly, in some regions of the PRC, especially in the southeast, the production of electricity, although growing, still does not keep up with demand. For example, hydropower is actively developing in Yunnan, but aluminum producers, in pursuit of reducing emissions, began to withdraw their capacities there so quickly that there are not enough new hydropower plants.
Back to gas
This is not the first time China has faced an electricity shortage. The country’s energy infrastructure turned out to be unprepared for such an increase in abatement, which opens up new opportunities for Russian exporters of hydrocarbons.
Oil and gas now account for over 60% of Russia’s exports to China. Talk about its diversification has been going on for many years, but China’s “green transition”, on the contrary, will increase the role of hydrocarbons in bilateral trade.
China is focused primarily on reducing its dependence on coal. It should happen gradually, but steadily – every year Beijing sets a new target. For example, in 2021, the share of coal in energy consumption should decrease from 56.8% to 56.0%.
However, it is not so easy to quietly abandon coal – it accounts for more than 67% of electricity production, which is then used in industry and in the residential sector. For example, at the end of September 2021, traffic lights stopped working in the northeastern provinces of China due to restrictions on electricity consumption, which caused chaos on the roads.
Gas can replace coal, and this will have to be done very soon, because the Chinese authorities promise not to increase emissions after 2030. And gas-fired power plants emit 50% less greenhouse gases than coal-fired ones.
According to the forecasts of the Chinese authorities, in the next five years, the production of electricity from gas will grow by one and a half times. This, in turn, will increase the demand for it by 40-50% by 2025. And by 2035, according to forecasts by McKinsey, gas demand in China will generally double.
This is where the development of gas exports from Russia to China – both through pipelines and LNG – comes in handy. In 2019, pipeline gas supplies began via the Power of Siberia. According to the Chinese customs for January 2021, it turns out to be the cheapest for Chinese consumers – $ 118.5 per thousand cubic meters. For comparison, at the beginning of 2021, Turkmenistan sold its gas to China at $ 187 per thousand cubic meters, Kazakhstan at $ 162, Uzbekistan at $ 151, Myanmar at $ 352.
In September 2019, President Putin proposed to supplement the already operating gas pipeline with another one by building the Power of Siberia-2. At first, they were going to pull it through Altai, but negotiations stalled due to price differences and problems with logistics. As a result, in December 2019, Gazprom proposed a different price calculation formula and a new route through Mongolia, which brought the project back to life. The capacity of the new gas pipeline may be up to 50 billion cubic meters per year.
Also in 2019, Russia began supplying liquefied gas to China for the first time – as part of the Novatek Yamal LNG project. In 2020, the volume of supplies doubled, reaching 5 million tons (this is approximately 6.7 billion cubic meters of pipeline gas) in the amount of $ 1.72 billion. This is not yet a leading position (Russia ranks only sixth among LNG exporters to China), but it is already a serious reserve for the future.
It is also noteworthy that Yamal LNG was built with the attraction of Chinese investments, loans and even equipment. Chinese investors, energy giant CNPC and the Silk Road Fund, own 29.9% of Yamal LNG.
In addition, the Export-Import Bank of China and the China Development Bank provided the project with loans totaling $ 12.1 billion, partially denominated in Chinese currency (9.8 billion yuan is about $ 1.47 billion). They paid in yuan with the Chinese contractors involved in the construction. LNG production in the Russian Arctic is going to be actively increased – Novatek is developing the Arctic LNG-2 project, where investors from China have already bought a 20% stake.
China’s Green Transition creates additional benefits for Russian gas imports. Joint projects of new gas pipelines, long-term gas supply contracts with Chinese buyers, Chinese investments in LNG projects in the Russian Arctic – all this to a large extent guarantees Russian exporters a niche in the largest gas market for the next decade.
Coal investment
One of the most controversial parts of Beijing’s low-carbon agenda is the introduction of green coal to reduce emissions. It is believed that such high energy efficiency coal makes coal-fired power plants greener, which means it can serve as a good compromise solution in the early stages of the green transition.
Therefore, despite criticism from environmentalists, new projects of coal-fired power plants continue to appear in China. In the first six months of 2021 alone, the provincial authorities of the PRC approved 24 pieces with a total capacity of 5.2 GW. For comparison, the capacity of the largest power plant in Russia, the Sayano-Shushenskaya HPP, is 6.4 GW.
As long as coal plays an important role in the Chinese energy sector, Russian exporters have another window of opportunity. In 2020, China was the leading export destination for Russian coal, accounting for 15% of supplies (29.4 million tons). At the same time, among the countries – suppliers to the Chinese market, Russia was only in third place ($ 2.4 billion), behind Australia ($ 7.9 billion) and Indonesia ($ 3.1 billion).
The weak transport infrastructure in the Far East is hindering the growth of coal exports. To solve this problem, in 2021 Russian Railways announced plans to modernize the Baikal-Amur and Trans-Siberian lines.
The project for 760 billion rubles (about $ 10 billion) is expected to be completed by 2024. President Putin even suggested allocating money from the National Welfare Fund (NWF) for this modernization. In July 2021, First Deputy Prime Minister Andrei Belousov spoke about financing the BAM expansion from the NWF.
It is planned to expand the BAM, among other things, towards the Elga coal deposit, the largest in Yakutia. The coking coal mined there with a high calorific value just fits the criteria of “green”, which they want to use more actively in China.
In 2020, the operator of the field, the Elgaugol company (owned by the founder of A-Property, Albert Avdalyan), established a joint venture with the Chinese GH-Shipping and began deliveries to the PRC market.
In 2021, they should reach 15-18 million tons, and from 2023 they should reach the level of 30 million tons per year.
The development of coal exports from Russia is a relatively successful example of how the state and business were able to adjust in time to the conjuncture and the largest consumer. Given the high quality of Russian coal, demand for it in China will remain even during the “green transition”.
Oil sunset?
Another point in China’s plans to reduce emissions is the renewal of the car fleet in favor of electric and hybrid vehicles. By 2025, the share of cars on new energy sources in the total sales of new cars should grow to 20% (now 5%). And by 2035 – up to 50%. This means that over the next five years, sales of such machines in China will reach 10 million.
Along the way, they plan to develop the corresponding infrastructure throughout China – they are going to build an average of 5,000 charging stations per year in Guangdong alone. Now there are about 36,000 of them in the country – the highest in the world. In Russia, for example, there are only 100 of them.
The Chinese shift to electric vehicles could significantly reduce global oil demand. According to forecasts of one of the largest energy companies in China, Sinopec, the peak of oil consumption in China will be in 2026, and then a decline will go. According to some estimates, the introduction of electric vehicles in the next 10 years will save China $ 80 billion in oil imports.
This is not good news for Russia, as it has been the largest oil supplier to China since 2013.
Only Saudi Arabia competes for the first place. There have been no major Russian-Chinese projects in the oil industry for several years.
So far, in the wake of the recovery from the coronavirus crisis, China is still increasing its oil consumption, but in the future, the “green transition” does not promise anything good for Russian oil in the Chinese market. But the demand for other energy sources from Russia will grow – high-calorific coal and natural gas.
The current energy crisis shows that China’s green transition will generate many more controversies. On the one hand, Beijing needs to ensure the country’s energy security and, accordingly, buy more coal.
On the other hand, to reduce dependence on coal energy by switching power plants to gas.
But both the first and second tendencies open up new opportunities for Russian energy exporters.
