China Is Aggressively Buying Up Cheap Russian LNG

• Russia is selling liquified natural gas from the Sakhalin-2 project at a 50% discount and the operating company, a new state-owned entity, is still making a profit.
• In August, China's imports of Russian LNG rose to the highest level since at least 2019, with the country buying volumes that were previously going to Japan and South Korea.
• China's imports of liquified natural gas from the United States have been on the decline as Europe has been paying a premium for those shipments. 

Russia is selling liquefied natural gas from the Sakhalin-2 project in the Far East to China at a 50-percent discount and still making a profit on it, Bloomberg has reported, citing unnamed traders.

“Russian supply is still making its way into the market, just with a reorganization of trade flows via market participants who don’t take issue with accepting Russian cargoes,” Saul Kavonic, an energy analyst at Credit Suisse, told Bloomberg.

The other two big buyers of Sakhalin-2 LNG, Japan, and South Korea, according to Bloomberg, stopped buying the commodity after Russia’s invasion of Ukraine. Japan, however, continues to receive Russian LNG from Sakhalin-2 under other contracts.

“It appears China is happy to take Russian LNG cargoes at discounts, swapping out alternative supply that can then be directed to Europe at higher prices.”

Despite the discount, LNG prices this year have soared so high that the operator of Sakhlin-2 is still making a profit. This operator, by the way, is a new state-owned entity that replaced the previous consortium.

The two Japanese partners in the original consortium were allowed to keep their stakes in the new entity as well. Shell abandoned its 27.5-percent stake in the project.

Bloomberg reports that data shows China’s imports of Russian liquefied natural gas rose to the highest since at least 2019 in August while shipments from the United States have been on the decline as they get diverted to Europe, which is ready to pay a premium for the supply.

Speaking of Europe, Poland this week suggested the European Union introduce a price cap on all gas imports, including LNG, as the costs of this alternative gas supply contribute to the energy price inflation cross the bloc.

For now, the European Commission, however, has only proposed a gas price cap on Russian imports following the same logic as the one employed by the G7 in imposing an oil price cap on Russian exports.

By Irina Slav for Oilprice.com

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