'Cutting off oil supplies to China is equal to a declaration of war' - analyst

As the US-China trade war continues to escalate, Beijing and its energy giants appear to be bracing for a worst-case scenario where the spat would drag on for years and possibly result in Chinese foreign oil supply stifled.

The idea that the world’s top oil importer could see some of its overseas crude supply blocked has always been an unthinkable notion, but now some analysts and Chinese industry executives suggest that China should prepare for the very worst of the worst, such as its oil supply impacted by a lengthy trade dispute.

“China is now looking at its oil supply situation from the worst-case scenario, like what the US has done to Iran,” Laban Yu, an analyst with Jefferies Group LLC in Hong Kong, told Bloomberg. 

“Obviously, China believes now more than ever that similar US sanctions against a whole country could happen to China.” 

Chinese oil industry executives said this past week that China’s oil industry must have a contingency plan in case the trade war takes another turn for the worse. 

According to Bloomberg, Wang Yilin, chairman of China National Petroleum Corporation (CNPC), told employees to prepare for a “protracted” trade conflict, while Fu Chengyu, former chairman at Sinopec, said that China should be ready for the extreme and far-fetched case that its oil supply could be blocked in the short term.  

Industry executives also stressed the need that China should work to achieve ‘energy self-sufficiency’, which, according to Fu, has become an “urgent reality.”

China’s oil import dependence is at 70 percent currently, so it can’t achieve this self-sufficiency in a decade or two, even if it were to start steadily reversing its declining oil production and tap more shale oil and gas resources.

Read more on Oilprice.com: How clean is “freedom gas”?

Over the past year, China’s biggest energy producers have started to tap more tight oil and gas wells, aiming to increase domestic oil and natural gas production at the world’s largest crude oil importer.

A PetroChina test oil well at a shale field in western China could finally mean a strong commercial potential for shale oil for the first time in the world’s top crude importer, Morgan Stanley said earlier this year. The shale boom in China, however, would be just a fraction of the US shale revolution—Morgan Stanley expects Chinese shale oil production could reach between 100,000 bpd and 200,000 bpd by 2025, which is nothing compared to the millions of barrels of oil pumped in the United States every day.

According to analysts at S&P Global Platts Analytics and Wood Mackenzie, China is set to miss its 2020 shale gas production targets, due to complex geology, low well productivity, marginal economics, and infrastructure constraints.

‘Energy independence’ is still a far-fetched idea in China’s case. Equally far-fetched is the idea that the fallout from the trade war could result in stifling Chinese oil imports, according to Neil Beveridge, an analyst with Sanford C. Bernstein & Co in Hong Kong.

Read: more on Oilprice.com: Why oil majors are going all-in on US shale

“It only happens when both countries are going into war. Cutting off oil supplies to China to some extent is equal to a declaration of war,” Beveridge told Bloomberg.

China, however, appears to be filling in its strategic petroleum reserves in recent months, as it has been boosting oil imports by 10 percent while refining output has been growing at five percent, according to the analyst.

Due to the trade spat, over the past few months China has also only sporadically bought crude oil and liquefied natural gas (LNG) from the United States—a sharp reversal from the booming Chinese imports of American energy at this time last year. There were even some months where China purchased no US crude oil at all, according to EIA data. It has also drastically reduced LNG imports from the US as China has a 10-percent import tariff on American LNG—a tariff set to rise to 25 percent on June 1. Even those Chinese buyers that have continued to purchase US LNG are now looking to swap American cargoes for cargoes from nations not subject to tariffs, traders with knowledge of the plans told Bloomberg earlier in May.

With the trade war heating up, China appears to be rallying all means and resources available to reduce the role of the US in its economy and economic growth, as Beijing has lost trust in the United States both as a supplier and an export market, Jefferies Group’s Yu told Bloomberg.

This article was originally published on Oilprice.com