How worried should Asia be about conflict in Ukraine?
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Vice Chairman, Energy – Europe, Middle East & Africa
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Combined with existing market tightness, concerns over disruption to Russian energy supplies in the event of conflict in Ukraine have pushed spot prices towards record levels. Across virtually all energy and natural resources, backwardation is back with a bang.
Inevitably, much of the attention is focused on the impact on Europe – in particular its gas market – given the prospect of military action, sanctions and supply disruptions. Leaders on both sides of the Atlantic have already been scrambling for global gas and LNG resources to cover any shortfall in Russian pipeline supplies in the event of Moscow intentionally cutting exports.
Across Asia, concerns have been more muted. Compared with Europe, the region is markedly less dependent on Russia for its energy supplies and lacks Europe’s scale of physical connectivity with Russia. And Russian exports to Asia do not require transit via Ukraine. But while any immediate disruption to Asia’s energy supplies looks unlikely, energy markets are global by nature: as current price volatility demonstrates, Asia can’t avoid the Ukraine crisis.
How dependent is Asia on Russian energy supplies?
The glib answer is not as dependent as Europe. At around 1.9 million b/d, Asia accounts for just over a third of Russia’s crude exports. Much of this arrives through the Eastern Siberia Pacific Ocean pipeline into northern China and Kozmino Bay on Russia’s Pacific coast, allowing for transhipment to China and other Asian markets. Currently, China imports around 14% of its total crude imports from Russia. For most other Asian countries, Russian volumes account for low single-digit percentages of total imports.
Gas is a similar story. Asia doesn’t come close to Europe’s level of dependence on Russian gas. Only China is physically connected to Russia by gas pipeline, though just around 7% of its total demand is currently met through a combination of Power of Siberia piped supply and Russian LNG. For other Asian markets, it’s all about LNG, with Japan the largest market receiving about 9% of its contracted supply from Russian projects in 2021.
Russian thermal coal supplies around 90 Mt, or 10%, of Asia’s seaborne imports. Over half of this is ex-eastern Russian ports with the remainder coming from its western and southern ports.
Could Asia’s energy supplies from Russia be at risk?
Any significant disruption to Russian crude supplies into China is unlikely. The physical flow eastwards without third-country transit, offtake agreements tied to Chinese loans and multi-currency payment structures would make efforts to sanction this supply largely unworkable. And while the Biden administration has been clear it has no plans to impose direct sanctions on Russia’s oil exports, even blocking Russia from SWIFT would likely have minimal impact on Russian crude into China.
Russian crude to Japan and South Korea – about 300 kb/d in 2021 – could see some impact akin to that for Iranian crude exports to those markets were the US to lean on its allies to reduce volumes from Russia.
China’s access to Russian piped gas is a similar story, with remote physical infrastructure, debt arrangements and non-US dollar payments making sanctions unworkable. One notable impact would be reduced availability of LNG into Asia were supplies diverted to Europe to make up for any shortfall in Russian gas. We forecast Asian LNG demand could be as much as 9% lower than expected in 2022 were this to happen, with Asian utilities maximising coal burn to free up LNG supply.
For coal, the risk to supply would depend on whether Asian countries followed any potential European sanctions on Russian supply. If not, then diverted supplies from Europe could improve availability into Asia although it would be with longer delivery times as supply through eastern ports is already at capacity.
What impact can Asia expect on energy prices if the crisis escalates?
While the Ukraine crisis has added upward pressure on oil prices in recent weeks, momentum was already there due to market fears of a supply shortage. We do not see an outright physical shortage. Although some product and crude stock levels are low, we expect this to ease through 2022 as supply growth runs ahead of oil demand growth. But this could change quickly if we see any significant supply disruption or strengthening of demand. Price risk is still to the upside over the next few months.
The impact of any military escalation on gas prices would undoubtedly be more dramatic than for oil, with Asian LNG buyers feeling some of the brunt of this. If supply is not interrupted, then prices should ease once initial fears are allayed. But if flows into Europe are disrupted, things would get much worse, with competition for global LNG intensifying dramatically.
If the EU imposes sanctions on Russian coal, the immediate question would be what Russia does with all the high energy thermal coal it sends to Europe, as well as the PCI coal to the European steel sector. Diversion to Asia is a possibility – if rail can take it – but high European prices would draw in coal from other Asian and US producers, leading to further distortion in a market already impacted by China’s Australia ban. The likely result would be higher prices for all.
Could Asia benefit from the Ukraine crisis?
Russia’s push for diversification of its export routes has been decades in the making. Moscow has invested heavily to create oil and gas export options that reduce reliance on transit countries and provide access to prized markets such as China. Russia has also launched upstream projects in the Arctic and is looking to maximise export options via the Northern Sea Route, giving Asia more direct access to Russian crude and LNG.
Russia’s reliance on China as an export market looks set to grow. It was no coincidence that President Putin’s visit to the opening of the Winter Olympics in Beijing earlier this month coincided with the signing of additional oil and gas supply deals. The current spectre of western sanctions on the Russian energy sector will only reinforce a desire to increase export optionality to Asia. In return, China will likely take the opportunity to push for elusive equity positions in Russian supply projects. A friend in need is a friend indeed.