Energy & Resources

Roll out the barrel

China is now taking half of Iran’s oil

Roll out the barrel

Watching China’s oil purchase

Must do better, was the message from Hillary Clinton last month, when she spoke of China’s contribution to halting Tehran’s uranium enrichment programme. Nonetheless the US Secretary of State stopped short of unleashing her ultimate deterrent: sanctions designed to punish those who help Iran. Instead she exempted Beijing from punitive measures ­– for the time being, at least.

The sanctions are serious: they exclude a named country’s banks from transacting with the US financial system (if they have been supporting large oil transactions with the Iranian regime). That practically shuts them out of the international financial markets, since they won’t be able to clear dollar payments.

The US has said that it granted the additional exemption period because there has been a 25% reduction in China’s imports of Iranian crude since the beginning of this year. But it also warned that it expects to see a “significant reduction in Iranian crude oil purchases” in the remainder of the year if the Chinese are to get a further 180-day exemption in future.

That looks unlikely. In fact, most analysts claim that the reason that Chinese imports had fallen so far this year was due to a contract dispute between Sinopec, the largest Chinese importer of Iranian crude, and the National Iranian Oil Company (which WiC mentioned in issue 134). But the row was resolved in March and by May trade had picked up again. Beijing was buying almost 524,000 barrels a day, a significant increase on previous months.

Reuters is now reporting that China is by far Iran’s largest customer for oil, at 590,000 barrels a day in July, or 54% of Iran’s total exports.

That would seem to set the stage for a diplomatic confrontation in the months ahead, especially as Washington’s policing of the embargo is just the sort of thing that grates with the Chinese leadership.

“China’s importing of Iranian oil is based on its own economic development needs,” complained a spokesperson for China’s Foreign Ministry last month.

“This is fully reasonable and legitimate.”

There is also tension over an FBI probe into ZTE, the Shenzhen-based telecom equipment maker, which has been accused of selling surveillance equipment to an Iranian customer. This time it is China’s Commerce Ministry complaining about the “groundless criticism” of Sino-Iranian economic relations.

Erica Downs at the John L Thornton China Centre in Washington agrees that the cutbacks in China’s purchases of Iranian oil may have been temporary. But she also suggests that Beijing is weighing up US warnings against its firms investing in Iranian oil or gas projects abandoned by their European and Japanese counterparts.

How long will that last? Clearly, Tehran is desperate to pull in more investment, as well as deliver more oil flow to Chinese customers. And 21CN Business Herald has been covering Iranian media reports that suggest that two Chinese companies are on the verge of investing $20 billion in two major new fields in Azadegan and Yadavaran.

The Azadegan field is rumoured to be one of the largest unexploited finds for a generation, and 21CN thinks a deal may have been done with PetroChina. For Yadavaran, the speculation is that Sinopec will be the lead investor, moving on from a preliminary deal signed with the Iranians in 2004.

Iranian television last weekend quoted Rostam Qasemi, Iran’s oil minister, as saying China will invest in both fields, whose output could eventually reach 700,000 barrels per day.

Neither of the two oil firms has commented on the reports. Beijing’s position is a delicate one: it wants to secure its participation in Iranian oil projects but prefers to delay major activity if that means provoking sanctions under US law.

Of course, other countries are also buying Iran’s oil, and China is just one of 20 countries to be granted an exemption from US action on Iran. But with the Chinese now taking more than half of Iranian oil supply, as well as the rumours of imminent investment, the chances of a political row with Washington must be increasing.

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