China holds the cards in US-EU poker

As the US shale industry struggles, energy sanctions targeting China are unlikely

Energy’s geopolitical and geo-economic importance means it is always at risk of becoming a pawn in wider strategic conflict. The standoff between Beijing, Washington and much of Europe—complicated by China’s ongoing crackdown on civil liberties in Hong Kong—is no different.

Few pundits see a quick way out of a deepening conflict that encompasses several major issues including the coronavirus pandemic—for which many across the world blame China, either through genuine analysis of the transparency of Beijing’s handling of the outbreak, or because of convenient, populist blame-mongering—trade and digital spying. As Petroleum Economist went to press, the US and China introduced mutual visa restrictions and further escalated their war of words over human rights, this time concerning Tibet, while dozens of Chinese companies including communications technology giant Huawei are under US sanctions.

Some media commentators have even suggested the US might consider defaulting on its $1.1tn debt to China. But even fewer analysts believe either side would be willing to draw the energy sector into the confrontation directly.

Business as usual

“I do not see any immediate risk of sanctions or other restrictive measures that might impair China’s ability to procure hydrocarbons from abroad, and develop energy projects on its own, whether hydrocarbon-based or renewables-focused,” says George Voloshin, a senior analyst at Aperio Intelligence, a UK-based strategic intelligence company. “China’s strong demand for oil is vital in a turnaround for embattled US shale, which means that the US government will very likely refrain from any move that might create complications for Chinese oil purchases.”

Energy demand and prices would be vulnerable to the effects of an out-and-out trade war, the prospect of which still looms despite a phase 1 deal which the US and China struck in January. But the impact of the global pandemic will be more decisive, according to Peter Petri, an international trade and investment expert at Brandeis University in the US.

“China’s strong demand for oil is vital in a turnaround for embattled US shale” Voloshin, Aperio

China appears to be doing well, in contrast to other major economies, despite the costs of extended lockdowns on millions of people and state surveillance that makes many foreign observers shudder. China’s oil demand has returned to close to normal levels in recent months, thanks in part to its stocking up on crude in recent weeks in order to take advantage of low prices, while the Shanghai Stock Exchange Composite Index is nearly 10pc above pre-­crisis levels.

This is bullish news for energy markets. “When Chinese economic news is good, energy prices jump,” Petri says. “China is the world’s biggest winner [from the collapse of energy prices] because it is the biggest buyer of foreign energy. Its savings on energy imports will cover a good part of lost exports to the US.”

Despite the many uncertainties, China continues to invest heavily in both fossil fuel and renewable energy sources. In early June, it approved a $20bn refining and petrochemicals project in Shandong province while, a few weeks later, it boosted its renewable power subsidies budget for 2020 by 7.5pc compared with last year, to $13bn. Beijing is also one of the leading foreign investors in oil and gas projects in the Middle East.

Unintended consequences

The Trump administration in early July warned off US domestic investors from Chinese companies due to the risk of further sanctions. And energy cooperation between Chinese, American and European companies more widely is likely to be a casualty of continuing antagonism.

But sanctions could easily explode in the sanctioner’s face, with US LNG exporters seen as particularly vulnerable. “What is really important, the fact that China stopping purchases of US LNG which would deliver a serious blow to that strategic American sector,” says Ariel Cohen, a senior fellow at the Atlantic Council thinktank in Washington, DC.

January’s US-China trade deal seems now to offer little hope of a more comprehensive resolution to the crisis. In any case, the agreement is particularly weak when it comes to energy, in Cohen’s view. He expects as little as 6pc of energy purchases pledged by China under the deal, or a total of $1.8bn, to be realised. 

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