x Abu Dhabi, UAETuesday 16 January 2018

China's hunger for oil hard for US to digest

The world's third-largest energy consumer continues to devour crude, meaning Washington faces a potential problem as it tries to tighten the screws on Iran.

Taxis line up to get their tanks filled in Chongqing, China.
Taxis line up to get their tanks filled in Chongqing, China.

The world's third-largest energy consumer continues to devour crude, meaning Washington faces a potential problem as it tries to tighten the screws on Iran. Tamsin Carlisle reports It is no secret that some OPEC nations have been pumping crude above their quotas. What is more mysterious in an oversupplied oil market is where in the world those unsanctioned barrels have ended up. In the case of Iran's estimated 400,000 barrels per day (bpd) of excess output, the answer could lie, at least partly, in China. The world's third-biggest energy consumer has been stockpiling crude for the past 18 months in response to a government programme to establish strategic petroleum reserves equal to 90 days of consumption.

It continues to do so as Beijing builds more storage to reach a 2020 target of more than 475 million cubic feet of state-controlled capacity. In the other direction, China's state-controlled oil companies may be planning to increase their supply of refined fuels to Iran as the traditional western suppliers have yielded to diplomatic pressure from their governments to discontinue business ties with Iran.

Chinese enterprises have signed agreements to develop three of Iran's biggest untapped oilfields. The unwritten side deal is for many barrels of current and future Iranian crude production to flow to Beijing in return for a smaller supply of fuel from Chinese refineries. While its oil exports to the West have shrunk, Iran strengthened its crude flow to China by about a third between 2007 and last year, to 544,000 bpd from 411,000 bpd.

China is Tehran's second-biggest customer for crude after Japan. Iran is Beijing's second-biggest crude supplier, behind Saudi Arabia. It supplied about 15 per cent of Chinese oil imports last year. Beijing looks to Iran as "a major source of future oil supplies", and that is not likely to change, said James Placke, a senior associate at IHS Cambridge Energy Research Associates. "They'd have to go through a substantial policy reversal and I'd be surprised if they did that."

That does not bode well for the success of Washington's plan to toughen sanctions against Tehran by cutting off petrol supplies and urging others to do the same. To work, that strategy would require a UN Security Council resolution, which China would be unlikely to support. Washington is understood to have asked its allies in the Middle East, including Saudi Arabia and the UAE, to supply more crude to China in order to lessen Beijing's dependence on Iranian oil.

Saudi Arabia in particular, has been happy to oblige. Its national oil company Saudi Aramco is in a joint venture to build a large refinery in China's Fujian province, configured to process Saudi crude. But Beijing will need more oil than even the Saudis can supply because the economy is growing at least 8 per cent despite the global downturn. India, which supplies the most petrol to Iran, is also unlikely to comply with the US call for tougher sanctions.

Like China, Asia's second-most populous nation is also a significant importer of Iranian crude and is looking at future gas supplies from Iran. China is not solely relying on Tehran to quench its oil thirst. It is also pursuing risky new oil production ventures in countries such as Iraq and Uganda. In Iraq, which has the world's biggest potential for expanding crude output, China has paid US$577 million (Dh2.11 billion) in signing fees for oil development projects giving it access to roughly 24 billion barrels of reserves, MEED, the Middle Eastern business intelligence newsletter, reported this week.

That makes China the biggest foreign investor in Iraq's oil sector behind the US, which, according to MEED, had committed $296m in signing fees to control about 12 billion barrels of reserves. Iranian rather than American influence now carries more weight with policymakers in Baghdad, which means the outlook for the Iranian and Iraqi oil sectors are linked. Tehran does not want to see its share of the global oil market eroded by its neighbour, while Washington is expected to assist Iraq with ambitious plans to boost crude exports.

But Iran's influence over Baghdad may wane as Iraqi political alliances shift after the country's national election earlier this month. In order for Iraq to form its next government, power-sharing deals to include groups wary of Tehran seem increasingly likely. Ironically, this may be one of the few factors working in Washington's favour as it seeks to tighten the screws on Tehran. @Email:tcarlisle@thenational.ae