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China’s net-zero target could dent Russia’s export ambition

The invasion of the Ukraine could presage Europe’s long-term shift away from a reliance on Russian energy. Alternatives will be neither quick nor easy, but the die is cast. As European Commission President Ursula von der Leyen put it last week, “A strong European Union cannot be so reliant on an energy supplier that threatens to start a war on our continent.”

Moscow’s countermove is an increasingly tactile relationship with Beijing. Russia has already invested massively in upstream production and export infrastructure to supply China, backed by eye-watering loans from Chinese banks and long-term contracts with Chinese energy companies. Today, China gets around 14% of its crude imports from Russia. And while only 7% of its total gas demand is currently met though the Power of Siberia pipeline and Russian LNG, China’s gas imports from Russia are rising rapidly.

A symbiotic energy relationship between Russia and China looks strategically compelling. The din of China’s economy has long been music to Moscow’s ears: having an energy-deficient economic superpower on your doorstep makes diversification away from Europe a less daunting prospect. Meanwhile in Beijing there will be a keen sense that there’s deals to be done with Russia.

But China is also committed to achieving net-zero emissions by 2060. Could Russia’s ambition to rotate the direction of its energy exports through 180 degrees flounder on China’s decarbonisation?

Russia’s China opportunity
In our base case Energy Transition Outlook (ETO), China’s oil demand peaks in 2027 but a modest decline curve keeps it above 13 million b/d by 2050. With falling domestic output, imports account for over 80% of supply by this time. Russia will see itself as critical to meeting this and helping China diversify its crude imports.

China’s gas market is a major prize. In our ETO, Chinese gas demand increases for another two decades before peaking in the mid-2040s at above 660 bcm (Europe is currently around 520 bcm, and declining). Around half of China’s demand will be met through imports, though this could be higher if domestic unconventional gas disappoints.

Achieving China’s decarbonisation target changes everything
Just as China’s demand growth creates opportunities, our base case ETO forecast is also a stark warning. The world has a monumental challenge to limit global warming to 1.5 degrees in line with the Paris Agreement and much of the outcome will be determined by China. Given the country’s near-90% dependence on hydrocarbons and annual production of around 11 billion tonnes of CO2-e and rising, China’s stated target of net-zero emissions by 2060 is only achievable through massive and immediate efforts to decarbonisation.

Our recently updated Accelerated Energy Transition 1.5 ˚C scenario (Global Net Zero 2050) transforms the outlook for China’s oil and gas demand. In the AET-1.5, China’s oil demand tumbles to under 5 million b/d by 2050 and requires only around 3 million b/d of imports. Gas demand halves to just over 300 bcm by 2050 compared to the ETO. Domestic production could potentially meet all this demand.

Hydrogen is the critical missing piece of China’s decarbonisation strategy
Achieving the outcome forecast in our AET-1.5 scenario for China is not impossible, but a broader approach is required. At present, China’s energy transition strategy is arguably flawed, with an over-reliance on renewables to decarbonise the power sector while policy support and investment is lagging in other essential areas including low carbon hydrogen and carbon capture. This needs to change for China to reach net-zero.

In the AET-1.5, China is the world’s largest hydrogen market by 2050, accounting for almost 40% of total demand and underpinned by hydrogen and ammonia co-firing in low carbon power. This needs massive investment in domestic production of blue and green hydrogen production. We estimate US$400 billion in cumulative capex is required for China’s domestic green hydrogen electrolyser capacity alone. In addition, China is by far the world’s largest low carbon hydrogen importer by 2050 in the AET-1.5, while it’s worth noting that Russia ranks as the second largest exporter by this time.

The future of Russian exports to China
Both the AET-1.5 and China’s net-zero 2060 target require the total transformation of the country’s energy system. China’s oil dependency is slashed through rapid decarbonisation as electric vehicles and hydrogen displace oil demand entirely in transport by the late 2040s. Record high prices could also encourage China to rethink the role of gas in its decarbonisation strategy, making a stronger case for renewables as well as green hydrogen and bio-methane. By doing so, China’s leaders may call into question the need for future large-scale Russian oil and gas import projects: longer term, Russian hydrogen imports may be more appealing.

Ultimately, our updated AET-1.5 analysis presents a scenario of what can be achieved if all stakeholders take the required steps to reduce emissions. But that does not make it a work of fiction. And while the cost to decarbonise China will run into the trillions, failure to achieve net-zero targets must be seen as an even higher cost.
Source: Wood Mackenzie

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