China curtailing Iran business as US tightens sanctions
The withdrawal of the China National Petroleum Corporation from Phase 11 of South Pars, announced by Iranian Oil Minister Bijan Zanganeh, is the latest blow to Iran’s development of the gas field holding one third of its 32 trillion-cubic-metre reserves.
It has been a year since Tehran expanded the role of the China National Petroleum Corporation (CNPC) to replace Total after the French company pulled out because of tightening US sanctions.
This is the latest sign of China curtailing Iran business as the United States tightens the screws, including the blacklisting of Chinese companies involved in transporting Iranian oil. The CNPC struggled to find payment channels to Iran, especially since Bank Kunlun, which the CNPC owns, cut back Iran dealings. Iran-China bilateral trade fell from $3.5 billion in July 2018 to less than $2 billion in July 2019.
Beijing wants to mitigate tensions with Washington given wider trade rivalries, while it condemns US sanctions against Iran and continues to buy Iranian crude. China’s balancing act is even more delicate given its Gulf interests, especially with Saudi Arabia.
While Beijing has remained Tehran’s main oil customer since US President Donald Trump scrapped “waivers” allowing Asian countries to buy some Iranian crude, its imports have fallen from around 650,000 barrels per day to 105,000-186,000 in August.
Those figures are uncertain. First, US waivers exempted oil that Chinese companies import as part of energy development deals in Iran. Second, Iran is adept at subterfuge, including tankers turning off transponders or taking indirect routes.
Third, Iran has built up a reserve of at least 15 million barrels — which it still owns — in storage in China. John Kilduff, partner in energy traders Again Capital, told Asia Times this amounted to a “legal fiction” under which the oil is “safe but hasn’t technically crossed customs yet.” Kilduff said the Chinese allow smaller, non-state refiners — so-called “teapot refiners” — to access some of these stocks.
Chinese companies are often a poor substitute for Western companies that have left Iran in fear of US sanctions. Energy projects, including Yadavaran oilfield where Sinopec is active, are sluggish. Deals for the Tehran-Mashhad electrified train line, refining and solar power appear stalled.
This is hardly the “strategic partnership” proclaimed by Chinese President Xi Jinping and Iranian President Hassan Rohani in Tehran in 2016, which envisaged $600 billion in trade by 2026.
The saga of South Pars Phase 11 is painful for Iran. Phases above 10 (up to 28) were originally scheduled for export, reflecting Tehran’s intention to change a situation in which domestic consumption absorbs nearly all annual production of 202 billion cubic metres.
The contrast with Qatar, with which Iran shares the South Pars/North Dome field, illustrates the costs to Iran of decades of sanctions. Qatar annually exports 124 billion cubic metres of gas, almost all as liquefied natural gas (LNG), the most flexible form for transporting but requiring technology Iran lacks.
Total signed an agreement for Phase 11, based on developing LNG, in 2004, then pulled out in 2009 because of tightening sanctions. It re-engaged after Iran’s 2015 nuclear deal, signing up in July 2017 for a 50.1% share of a project with the CNPC and Iran’s Petropars.
Even then, many doubted Total’s willingness to develop LNG capacity, with reports that gas from Phase 11 would be consumed domestically and not be converted to LNG. When Total withdrew in 2018 after Trump renewed sanctions, industry experts doubted that the CNPC had the technical wherewithal or commitment to lead the project.
Beijing is wary. The world’s largest oil importer since 2017, China has a strong interest in Gulf security as the region supplies half its imports. Most pass through the Strait of Hormuz, a vulnerability Beijing plans to bypass by developing the $11 billion Duqm Special Economic Zone in Oman.
When US-Iran tensions increased in May and June — with attacks on six tankers near Hormuz, blamed by Washington on Tehran, and Iran downing a US drone — Chinese Foreign Minister Wang Yi called on “all sides to remain rational… and not take any escalatory actions… [or] open a Pandora’s box.”
China’s relations with Riyadh were highlighted by Saudi Crown Prince Mohammed bin Salman bin Abdulaziz meeting with Xi in Beijing in February, when the two leaders agreed $28 billion in economic deals, including a joint Aramco-Norinco petrochemical venture, following $65 billion of them they signed in Riyadh in 2017.
The two leaders adopted the rubric “Together for a Promising Future” to link the countries’ strategic outlooks, Saudi Arabia’s Vision 2030 and China’s Belt and Road Initiative (BRI).
In the long run, some say Beijing’s links may build bridges. “China is very serious about providing economic and political means to move the BRI forward and this favours co-existence between Iran and its Arab neighbours,” said Kaveh Mirani, board member of the National Iranian American Council. “Rohani and [Foreign Minister Mohammad Javad] Zarif have for some time been promoting ideas of de-escalation and the eventual ending of hostilities.”