With Russia, we remember centuries of territorial disputes, with the British their past control of our oil, and with the Americans we remember them supporting the Shah,” says a leading business journalist in Tehran. “There is no memory of China in our contemporary history, and therefore little emotion.”
On the other hand, Iranians are wary of cheap Chinese goods that have — as in so many countries — flooded the market, bankrupting domestic textile and shoe manufacturers. And there are rumbles too over the quality of Chinese technology in building the Tehran metro.
As a result, mixed feelings over China abound in Tehran as Iran’s relationship with Beijing becomes crucial both to its economy and its international policy. As the latest wave of United States-led sanctions squeeze Iran’s trading partners, including South Korea, many Iranian analysts are nervous about overdependence. This is political as well as economic; China now stands as Tehran’s main supporter in the United Nations Security Council, after Moscow’s decision in September not to supply the S-300 missile defense system signaled its disquiet with Iran.
In economic terms, the summer’s United States and European Union sanctions have increased China’s importance to Iran both as a supplier of gasoline and a buyer of crude. Sadegh Zibakalam, politics professor at Tehran University, warned in September of the dangers.
“It would be most unpleasant if the Americans make trouble for the Chinese,” he wrote. “China has for some time decreased its investments in and oil purchases from, Iran… The claim that the sanctions have not worked and have forced us to blossom is all entertainment and propaganda.”
China has considerable investments in Iran’s energy reserves, including an agreement in principle to buy 10 million tons per year of liquefied natural gas (LNG) over 25 years from the largely untapped South Pars field. Sinopec, the Chinese oil group, has agreed rights to exploit the Yadavaran oil field in the southwestern Provence of Khuzestan, with reserves reported at 15 billion barrels.
But much Chinese investment is far from nailed down. Work at Yadavaran is overdue.
There have also been reports in Iran that China National Petroleum Corporation (CNPC) has slowed down work on a master plan for the South Azadegan oilfield, despite Iran pressing it for a final agreement on a 70 percent stake. Under US pressure, Japan’s Inpex announced last month it would be relinquishing its 10 percent share in Azadegan.
CNPC has also trimmed its involvement in the second phase development of the Masjid Soleyman field in Khuzestan. Work seems far faster at North Azadegan, where engineering, procurement and construction tenders are expected this month after CNPC recently finished the front-end design.
Crude sales slowing
As a supplier of gasoline for Iran, China has become more important since operators including BP, Vitol, Trafigura, Glencore and Reliance ended sales earlier in the year because of threatened US action against suppliers. At the same time, there are growing, if inconclusive, reports that Iran is having difficulty selling crude. This could have a marked fiscal impact as oil sales account for around 80 percent of Iran’s foreign currency revenue and 60 percent of the government budget.
UN and EU sanctions exclude crude sales, but US banking restrictions have impeded the use of letters of credit, while EU restrictions on insurance deter shipping companies from sending tankers to Iranian terminals. Traders had been using Asia-based banks to open letters of credit, but recent sanctions announced by Japan and South Korea obstruct this option, leaving Chinese banks as the main source of finance for Asia’s trade with Iran.
Iran has reduced the amount of crude stored at sea since a peak in June of 40 million barrels, the highest offshore build-up of Iranian crude since 2008. But it still had 20 million barrels anchored offshore in late September, according to Reuters. The Paris-based International Energy Agency (IEA) said in September that Iran might resort to storing more oil in tankers “as new sanctions have the unintended consequence of squeezing crude buyers.”
Thomas Strouse, of Washington-based oil consulting firm Foreign Reports, has used Chinese customs figures to ascertain that Iran remains the third largest oil supplier to China, a position it has held consistently since 2005 behind Saudi Arabia and Angola. But from January through to the end of August, Chinese crude imports from Iran did decrease year-on-year by 24.7 percent to some 391,000 barrels per day.
Scaring the customers
Strouse argues that China’s reduced imports were less a consequence of Western political pressure than of Tehran’s uncompetitive pricing.
“There are a number of reasons for China’s reduced oil imports from Iran and not all of them are political,” he says. “China wants to diversify its supply, and this means reducing its dependence on Iranian oil imports. It would be logical to assume that the Chinese have made a geopolitical assessment that Iran may not be the most secure and stable source of supply in the future.”
But that is far from the end of the story. “Additional reasons for China’s reduced imports from Iran include uncompetitive pricing and reduced Chinese demand for Iran’s heavy crude,” says Strouse. “Japan, the other leading purchaser of Iranian oil, has also reduced its imports from Iran in 2010, offsetting this reduction by a surge in imports from Russia. A new supply of oil from Russia’s Eastern Siberia is seen as more favorable, not only because of its geographical proximity to Japan, but also because of the reduced threat of a potential supply disruption in a place like the Strait of Hormuz.”
In general, China wants a diverse supply as it pursues high economic growth, and Iran is not expected to increase production in coming years. But those in Tehran nervous at political and economic dependence on China will note that while China currently imports only around 8 percent of its oil from Iran, more than 15 percent of Iran’s oil exports flow to China.
The centralization of Chinese buying increases the scope for geopolitical assessments in its decision-making. “Beijing can turn the tap off, if it wants,” says the Iranian business journalist.
China’s only two lifters of Iranian crude — Unipec, the trading arm of Sinopec, and Zhuhai Zhenrong — are both state-run, and they are also among the Chinese companies that have been supplying around half of Iran’s gasoline imports, exploiting the gap left by suppliers fearful of US sanctions. Overall, China will likely continue to take advantage of opportunities in the Iranian market, but will keep a watchful eye on its wider political and economic interests.
US officials have recently been saying that China is violating UN sanctions against Iran, and President Barack Obama has reminded the Chinese of their extensive interests in the United States. The American right wing has China firmly it its sights. “The US State Department estimates that companies have terminated between $50 and $60 billion in energy projects in Iran owing to the threat of sanctions, but European businesses remain concerned that Chinese companies will snap up their voided Iranian contracts if and when they withdraw,” said Mark Dubowitz of the Foundation for Defense of Democracies in September.
Iran knows it still offers opportunities for China. Both in government and among ordinary Iranians, there remains a deep-seated sense of the country’s rich natural resources.
If anyone around the world had forgotten this, in October Iran declared a hike in its oil reserves estimates by nearly 10 percent to 150.3 billion barrels — just days after Iraq announced a 25 percent increase to 143 billion barrels in its reserves.
Iran also boosted its gas reserves figure by nearly 18 percent to 33.1 trillion cubic meters, cementing its position as the holder of the second richest gas resources after Russia.
But extracting those carbon reserves is far from easy with US, European and many Asian companies eschewing the market. Massoud Mir-Kazemi, Iran’s oil minister, warned earlier this year that the country required $25 billion per year in investment just to maintain current oil production levels. This figure is unlikely to be raised by Chinese investment or by issuing bonds. No wonder the IEA has forecast Iran’s oil-pumping capacity will by 2015 drop about 18 percent to 3.3 million barrels per day.