China’s Energy Hedging Strategy: Less Than Meets the Eye for Russian Gas Pipelines
Amy Myers Jaffe, Kenneth B. Medlock III, and Meghan L. O’Sullivan
February 9, 2015
China’s energy needs have been a major factor shaping the global energy landscape in the 21st century. A significant contributor to rising global energy consumption and increasing prices over the last decade, the country is being actively courted by the world’s largest oil and gas exporters as a pivotal growth market for the future. As part of this, policymakers and industry leaders have been closely monitoring the potential for growing strategic and energy ties between China and its producer neighbor, Russia.
Many look at China’s voracious appetite for energy and its desire to address environmental concerns by substituting natural gas for coal and conclude that Russia, if it moves quickly and is flexible enough on price, will be able to solidify energy trade with China on a scale that has strategic consequences. Worries abound that a deepening trade relationship could provide Russia with leverage over China similar to how natural gas trade between Russia and Europe has often curbed European criticism of and action toward Moscow.
This essay suggests that this is not a foregone conclusion. Instead, China’s growing energy relationship with Russia might be best understood as a hedging strategy to lock in multiple suppliers to reduce Chinese exposure to supply disruptions and to leverage cheaper energy imports. China’s actions related to natural gas are typical consuming-country policies aimed at enhancing fungibility among natural gas imports and are motivated by a desire for greater energy security. Indeed, when faced with liquefied natural gas (LNG) prices that have exceeded $20 per thousand cubic feet in recent years, China clearly has an interest in seeking alternative sources of supply from lower-cost providers.