The future of Iran-China energy relations in the post-sanctions era

OMID SHOKRI KALEHSAR
Published 29.01.2019 00:08 Modified 29.01.2019 00:08

In 2015, after the nuclear agreement was agreed upon and sanctions were on the way to being lifted, Iran openly declared that it was seeking $200 billion in investment to develop its oil industry. Of this, $130 billion, it was posited, ought to be spent on the upstream of the oil and gas industry. Many of Iran's oil wells are in the latter half of their lives, and their production capacity is rapidly decreasing. Energy, mainly from oil exports, is one the main foundations on which Sino-Iranian relations have been founded in recent decades. China's growing economy needs energy from a variety of reliable sources, and Iran's huge oil and natural gas reserves go a long way toward covering surpluses in demand. By 2017, the bilateral volume of trade amounted to around $37.2 billion – massively in China's favor. China is Iran's foremost trading partner.

Coping with sanctions

The Iranian government is also trying to negotiate with other investors in China and Russia to find new customers to sell oil and deal with oil and financial constraints, using past experiences. Forming tenders, selling to the private sector, using digital currencies, using domestic means to explore, rehabilitating and renovating facilities, reducing domestic consumption, tackling fuel smuggling and increasing the efficiency of energy carriers, form the bulk of Iran's efforts to reduce the effects of sanctions.

The fact remains that the potential realization of the U.S.' aims for Iranian oil sales to hit zero depends on various factors coming into play. The world is facing increasing demand for energy and compensation for reducing the supply of 2.5 million barrels of Iranian oil on the market by other producers will not be an easy task and requires time. Venezuelan exports have also fallen due to such conditions, and both have contributed to the rise in global oil prices.

The U.S.' latest sanctions target various ends of the industry, including consumers, producers and investors who are willing to cooperate with Iran, which increases the risk of a large dent in Iran's economy to a degree which will only become clear in the next five years or so.

China's oil imports from Iran amounted to 874,000 barrels per day on the eve of U.S. sanctions being re-declared in August 2018. The last record available showing China's oil purchases from Iran were 803,000 barrels per day. Comparatively, the amount of oil purchased from China in January 2018 amounted to 304.5 million barrels per day, up 32.2 percent from the 229.9 million barrels purchased in the whole of the 2017 period, thus growth in trade was on a steady course.

Despite sanctions, China is expected to remain Iran's largest oil customer, as Beijing has consistently said that trade ties between the two countries will continue despite sanctions, China being one of the few countries with the clout to remain unaffected by U.S. sanctions against cooperation.

Iran is likely to step up its efforts to maintain its economic and political ties with China, and will strive against China to safeguard its multiple interests against the looming crisis. Beijing will likely continue its economic engagement with Tehran to pursue well-needed oil supplies. This will likely be coupled with political engagement with Tehran aimed at mitigating Washington's desire to punish Chinese firms.

Of course, it is possible for Iran to sell as much as 100,000 to 200,000 barrels per day through smaller operators that do not interact with the United States and thereby would not be directly affected by sanctions. During the last round of sanctions, this was provided by many Malaysian companies active in Iran, taking shipments from hidden storehouses. Iran is likely to sell 500,000-600,000 barrels this way but may not be able to have a regular customer who can regularly redeem these supplies. Part of this regard payment, if Iran exports oil to China, it cannot take its money.

However, it may take money from smugglers. Iran's problem is the export and receipt of money. India still owes much debt to Iran on this very basis. The Chinese account has just been settled for three months. Korea also still owes Iran from the previous boycott. It is likely that the latest round of sanctions will thus squeeze Iran's purse even more effectively.

Iran has the opportunity to increase exports and production in spite of these limitations, but its main problem will be attracting foreign investors, which is rooted in U.S. sanctions: sanctions that prevent large multinational corporations from investing in Iran.

The repeated threats of U.S. officials to apply secondary sanctions against any country that continues their trade relations with Iran, such as the words of the head of the Iran's Action Group, which was recently raised in response to China's emphasis on maintaining economic relations with Tehran, has forced Washington to look further into maintaining its power to enforce the regime.

As one of the eight countries that Washington has given a six-month exemption clause to, China has been allowed to purchase 360,000 barrels of crude oil per day from Iran beyond the implementation of general sanctions. According to U.S. sources, the terms of the purchase and payment method have also been specified.

China purchased an average of 655,000 barrels of oil from Iran between January and September 2018. The United States has given eight countries, China, Greece, India, Japan, Italy, South Korea, Taiwan and Turkey, exemptions from import sanctions for six months. One of the reasons for this exemption was that these countries had significant amounts of Iranian oil in their energy baskets. China is set to continue oil imports after this time, however, and U.S. officials in August said they could not persuade China to stop importing Iranian oil, yet the Chinese have agreed not to increase their purchase from beyond the limits set by the six-month waiver.

Post JCPOA, South Pars Phase 11

In 2017, a contract for the development of the South Pars Phase 11 was signed between Total with 50.1 percent of shares, China National Petroleum Corporation (CNPC) with 30 percent and Petropars of Iran with a share of 19.9 percent, but in the absence of an exemption when sanctions were announced once again, Total abandoned the project. With the withdrawal of Total, the CNPC stepped in with a $4.8 billion investment in Phase 11 of the South Pars project.

For the next five years, the pressure of the South Pars field fell sharply and the 1,500-2,000 tons of platforms on the field need to be replaced with 20,000-ton platforms. The cost of building each 20,000-ton platform with compressors is estimated at around $ 2.5 billion, with neither Iran nor the Chinese company manufacturing the technology needed. Iran hoped that Total would, along with the construction of the first large platform, bring its technology to Iran. According to Iranian officials, after five years at least, there will be 10 huge platforms to be installed in South Pars to maintain production.

Currently, almost all of Iran's oil exports to China are carried out by the fleet of the National Iranian Oil Tank Corporation. Under the new conditions, the cost of transportation and insurance for the total export of petroleum from Iran to China is to be borne by Tehran.

Iran is happy to take the advantages afforded by Chinese investment – particularly in shared fields the major concern over the Chinese NOC is financial capital and technology. In some fields, Iran needs high technology for extraction from deep water – and it seems that Chinese companies, in contrast to their EU and U.S. counterparts, do not possess the skills or experience required. China needs Iranian oil for as long as its growth continues, yet other producers exist, meaning ties could be shaken over the long term. Sanctions are sure to only add to the temptation to look elsewhere, as when it comes to Chinese companies investing in mutual projects with U.S. companies, many in China will find it a disadvantage to miss out on a U.S. deal due to conflicting engagements with a far less lucrative trading partner.

* Ph.D. candidate in International Relations at Yalova University

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