China and the World

Straitened circumstances

As pressure on Iran mounts, China looks to diversify its oil supply

Straitened circumstances

Hot topic: Iran’s oil exports

Threats by the Iranian government to block the Strait of Hormuz have taken the war of words between Tehran and Western leaders to a new level.

Some are confident that it is a case of Iranian bluster. “Do I really think that they’re going to go ahead and try to shut the Straits of Hormuz?” Dennis Ross, President Obama’s former special assistant on Iran told Bloomberg.

“I do not. They will be the ones who suffer the most from that.”

But Beijing isn’t taking any chances. Accounting for around 10% of its crude imports, Iran is the third largest oil supplier to China. Hence its concern about a worsening political situation over Hormuz, as well as a greater effort to diversify Chinese supply.

The process has already started. At the end of last year, Sinopec and Iran failed to reach agreement on credit details for a larger contract. As a result, Sinopec reduced its crude oil purchases in January to 285,000 a day, approximately half the amount purchased in the same period last year.

That particular dispute suggests the smaller order stems from commercial disagreements. But another state-owned oil company, Zhuhai Zhenrong, has also halved its imports of Iranian crude to 120,000 barrels a day, suggesting that other Chinese companies may be reducing their exposure to Iran as a matter of course.

So it is probably no coincidence that Premier Wen Jiabao is visiting three major energy suppliers this coming week, with a tour of Saudi Arabia, the United Arab Emirates and Qatar. No doubt each will be happy to help move Chinese orders away from Iranian suppliers.

Wen will leave for the Middle East just days after receiving US Treasury Secretary Tim Geithner in Beijing, in a trip seen as part of a US diplomatic effort to pull in wider support for stricter sanctions against the Iranians.

Officials in Beijing will also be aware of the risk to their interests should sanctions be tightened. Chinese firms have signed $120 billion worth of oil and gas contracts with Iran – deals that could be jeopardised by a worsening situation.

In the interim, Chinese companies have been putting further large-scale projects in Iran on hold. China National Petroleum Company (CNPC), the gas-and-oil parent to listed PetroChina, last year delayed the second phase of a gas field project in South Pars. CNOOC has also withdrawn from a gas project and Sinopec has postponed the starting date for work on an Iranian oil field.

These delaying tactics have not gone unnoticed. Last summer, the National Iranian Oil Company threatened to hand the CNPC project to domestic contractors if progress was behind schedule.

And it is not just energy companies limiting their operations in Iran. Huawei Technologies said last month that it will reduce the scope of its own business in the country, blaming an “increasingly complex situation”, reports Bloomberg. (Huawei may view this as a way of winning favour in Washington where it wants to portray itself as a good corporate citizen.)

Not that the Chinese will want to be pushed into a corner on Tehran (just as they’ve shown little inclination to bow to international pressure over North Korea). The Global Times also reaffirmed this week that Beijing is opposed to “unilateral sanctions”. In fact, some think China’s recent moves to cut exposure to Iran’s oil is all part of a clever bargaining strategy. Should the US and the EU announce sanctions, the Iranians will have few choices but to sell their oil to the Chinese, reports the Financial Times. Beijing will then expect a hefty discount.

One Geneva-based trader told the FT this week that he had little doubt that the Chinese would be looking for a deal. “The only question is about price,” he suggested.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.