Energy & Resources

A new Iran plan

China to invest $280 billion in Iranian oil

Tanker-w

China’s new Iran policy

When China introduced a 5% tariff on imports of US crude this month, it seemed a self-defeating move. Although it might hurt the world’s largest oil and gas exporter – the US took that mantle from Saudi Arabia this year, CNN says – it would surely harm the world’s largest importer of oil even more.

China’s largest refiner, Sinopec, was one of the first into the firing line, having tried to take advantage of an apparent lull in Sino-US tensions to restart oil imports earlier this summer. According to Bloomberg, at least six supertankers filled with US crude were en route to China when the new tariffs were announced this month. This stranded several in Chinese coastal waters as Sinopec left the oil on board rather than pay the pricy import tax. (Sina quoted a source as saying that the new tariff will add $3 a barrel to the cost of the crude in the tankers.)

Late last week more of Beijing’s reasoning became clearer after Petroleum Economist magazine reported that the Chinese are planning to invest $280 billion in Iran’s oil, gas and petrochemicals sector over the next five years.

The magazine cited a senior official from Iran’s Oil Ministry, who said that the commitment was confirmed during a visit from foreign minister Mohammad Javad Zarif to China in August.

The deal, which had been initially negotiated in 2016, will allow the Chinese to purchase oil, gas and petrochemicals at a 12% discount.

Washington has taken a hard line with countries that have tried to trade with Tehran since the Americans withdrew from the Iranian nuclear deal in May 2018. This spring it refused to extend waivers to countries, including South Korea, which have relied on Iran’s condensate (ultra-light crude) for its petrochemicals industry.

This summer it also launched action against Chinese importer Zhuhai Zhenrong for breaching restrictions on doing business with the Iranian oil sector. Beijing protested, but the state-owned firm has been barred from any foreign exchange, banking and property transactions under US jurisdiction.

Experts have claimed that other entities have flouted the US sanctions by taking oil from Iranian tankers, which turn their transponders off shortly before meeting Chinese vessels out at sea.

All the same, China’s imports of Iranian oil have plummeted from about 2.5 million of barrels of oil per day (bpd) in 2018 to about 215,000 this year. Imports from Venezuela also fell about 13% during the first half of the year. In August, Trump signed an executive order threatening to freeze the US assets of any company that materially assists the Maduro government. “Trump is using America’s vast oil and gas resources as a tool of influence around the world,” CNN concluded.

The International Energy Agency (IEA) calculates that the US will generate 70% of the world’s new oil supply (equivalent to four million barrels a day) through to 2024. Much of it will head for Asia-Pacific, where the US is trying to build up its customer base after lifting an export ban in 2016. Asian refiners are major customers for the kind of low-sulphur, sweet crude produced by the Permian fields in Texas.

Like South Korea, India has switched from Iranian to US crude. According to Bloomberg, leading Indian refiner Bharat Petroleum has purchased a couple of the Sinopec cargos that were previously en route from the US to China, while another of Sinopec’s tankers managed to dock before the tariffs took effect.

The bigger question is how the Chinese will respond if Washington takes action against more of their companies for doing business with Iran. Dan Brouillette, deputy secretary of the US Department of Energy, made clear this week that the Americans are unhappy with the deal. He also told Reuters that all Iranian oil shipments will continue to be monitored and that Washington will consider blacklisting any party which violates the sanctions.

However, energy consultant Robin Mills told the Times in the UK that China has a habit of seizing on moments of crisis between Iran and the West to announce big investments, but then holds back on exploiting them.

Meanwhile Sinopec has applied for exemptions on the remaining shipments of American oil waiting to be unloaded at Tianjin’s port.


© ChinTell Ltd. All rights reserved.

Exclusively 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.