Russian gas pivot toward China will ease Europe’s energy crunch

Russia is boosting natural gas shipments to China as it curbs flows to Europe, a dynamic that may offer some respite from the unprecedented rally in energy costs, according to consultant Accenture Plc.

Gas prices in Europe soared after Russia slashed supplies to its biggest market following the invasion of Ukraine and imposition of Western sanctions. At the same time, Gazprom PJSC is shipping record volumes by pipeline to China, easing overall demand for liquefied natural gas and helping to balance the market, said Ogan Kose, a managing director at Accenture. 

"What will make a significant impact is Russian gas being supplied to China," Kose said in an interview this week. "China's demand for LNG imports will drop as a result of that, easing prices globally."

European nations are seeking more LNG supplies as they seek to cut their dependence on Russian gas. With the region expected to remain the premium LNG market for months ahead, producers are also redirecting capacity toward Europe. 

While Russia's pipeline gas exports to China are currently still a fraction of sales to Europe, increasing flows are set to displace higher-priced LNG in the Chinese market. 

The war has pushed Russia to accelerate plans to diversify away from Europe, with gas exports increasing via the Power of Siberia pipeline and plans to build new links to China. The biggest fields in Siberia, which currently feed Europe, will eventually be connected to China, giving Russia an alternative outlet for its vast resources as relations with the West deteriorate.

"Russian gas molecules are going to be sold somewhere else, primarily in Asia," Kose said. "There is always going to be another buyer for that gas."

China, which also imports gas via links with Central Asia, is buying more pipeline gas and less LNG while demand has been suppressed by Covid-19 lockdowns. 

China has been absent from spot LNG purchases so far this year and its appetite may remain low through September amid "prohibitively high LNG prices and looming uncertainties around the pandemic and the economy's outlook," according to BloombergNEF. 

A big concern for European prices is how quickly China comes out of covid lockdowns. As Chinese economic activity recovers, it may start to compete with Europe for LNG cargoes, Goldman Sachs Group Inc. said in a note last week.

Should Russia impose a complete halt on gas flows to Europe, prices may spike to five times the current level, according to Accenture. Still, that wouldn't last beyond the coming winter, with the average price in 2023 expected to be lower than this year, Kose said.

Recession risk
The risk of global recession will also curb gas consumption, with demand shrinking as much as 16% in the European Union next year, according to Accenture. The EU is already urging a 15% reduction in gas use through the winter, while French utility Engie SA reported that clients are cutting gas use. 

"The combination of demand destruction in Europe and Asia and Russian gas finding new outlets will bring gas prices down in the mid-term," Kose said. "If the winter is worse compared to previous winters, it will keep prices high for a while, but the high price environment is not sustainable in the long term."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.