x Abu Dhabi, UAETuesday 25 July 2017

Tehran is feeling the squeeze as Beijing warms up to Riyadh

There is an increasing body of evidence that Iran needs China much more than China needs Iran. This is not good news for the government in Tehran.

While winter is in full swing in Tehran with snow blanketing the capital, senior officials of the Islamic Republic can be forgiven for feeling hot. Over the past three weeks, the major powers have dramatically turned up the pressure on Iran over its nuclear programme. We have now entered the oil-squeeze phase.

The US Congress passed legislation recently targeting companies that conduct business with Iran's central bank. The sanctions would bar those companies from access to US financial markets - a huge blow for any company with global ambitions. Who conducts business with Iran's central bank? Buyers of Iranian crude oil, most of whom do not want to jeopardise their business with the US.

Meanwhile, the European Union is set to raise the stakes in its own tough sanctions regime on Iran. It intends to ban all oil purchases from Iran by its 27 member states as early as this week - a dramatic and sweeping gesture that would immediately alter course for a large chunk of Iran's oil exports.

For Iran, oil exports are its lifeline. Oil accounts for 80 per cent of Iran's hard currency earnings and more than 60 per cent of fiscal revenues. Iranian threats to close the Strait of Hormuz should be seen as mere political theatre. After all, such an attempt would hurt Iran more than anyone else because the vast majority of Iranian oil moves through the Strait toward its main buyers: China, India, Japan and South Korea.

China is Iran's largest buyer of crude oil, averaging more than 500,000 barrels per day in 2011, although a pricing dispute with a key Chinese buyer has halved those numbers in the last two months. China also sells refined petroleum to Iran and its state-owned entities are the last ones willing to invest in Iran's oil and gas production and exploration.

Iran is over-reliant on China for its oil and gas future. Advocates of the Iran oil-squeeze play from Brussels to Washington have been lobbying hard to get China on board. Diplomatic envoys from Washington and Brussels have shuttled in and out of Beijing with the same message: stop or slow purchases of Iranian crude.

The heat is also being felt in Tokyo, Seoul and New Delhi. Six out of 10 barrels of exported Iranian oil go to those four Asian countries. Japan, India and South Korea have all sent signals that they will now look for alternative sources as they reduce intake from Iran.

But what about the big prize, China? Beijing usually publicly condemns such efforts to limit its business with Iran, which Prime Minister Wen Jiabao called "normal" and "justified" during his recent GCC tour, but often quietly distances itself from Tehran as the pressure intensifies. A case in point: China has dragged its feet on multibillion dollar investment deals in Iran's oil and gas sector, leaving Tehran frustrated and its oil and gas sector deteriorating for lack of finance and technology. In leaked US State Department cables, Chinese state-owned energy company executives downplayed their role in Iran to American diplomats, which has frustrated Iranian oil officials who want China to deliver on its promises. One Chinese executive told an American diplomat that Iran liked to trumpet multibillion dollar "signed deals" in its newspapers although they were merely memorandums of understanding.

Thus, the recent visit of Mr Wen to three GCC states - Saudi Arabia, the United Arab Emirates and Qatar - highlighted the oil squeeze. Was Mr Wen seeking assurances from these states that they would provide energy-hungry Beijing with "replacement oil" if it chose to reduce Iranian imports? After all, Iran was China's third largest supplier in 2011.

That question will be answered soon enough. We can simply watch Chinese crude oil purchases over the next six to nine months to detect a pattern. But the larger issue from the visit that fails to get headlines is this: China is deepening its strategic energy relations with Riyadh, looking to build ties with Doha and Abu Dhabi, while engaging in a mere transactional manner with Tehran.

For China, the big prize is Saudi Arabia. During Mr Wen's visit last week, China Petrochemical Company, also known as Sinopec, signed an $8.5 billion (Dh31 billion) deal to build a 400,000-barrel-a-day refinery in Yanbu on the Red Sea. What's more, most of that product will be sold to the Saudi market. Beijing sees the project as a way to build favour with Riyadh. Saudi Aramco and Sinopec are also building a joint refinery in China, and executives from Saudi Aramco have openly talked about China as their most important market. The Beijing-Riyadh link is shaping up to be the most important energy relationship of the 21st century.

In Doha, Sinopec signed a deal with Qatar Petroleum International and Royal Dutch Shell to build a refinery in the eastern city of Taizhou, and inked a "strategic" agreement with Abu Dhabi National Oil Company to cooperate in the production and storage of oil. Iran is being left out in the cold as China builds its institutional alliances with regional national oil companies. In fact, while China drags its feet in Tehran, it has poured billions into Iraq's oilfields.

Thus, the China-Iran relationship is not a strategic one for Beijing, but it is vital for Tehran. Beijing will not cut its Iran relations entirely, nor will other Asian buyers (a waiver exemption in the US legislation allows wiggle room for countries that reduce their intake). But Tehran could be in for a cold spring as it scrambles to make up for what look to be inevitable reductions from its major buyers.


Afshin Molavi is a senior fellow at the New America Foundation and a senior adviser at Oxford Analytica

Follow on Twitter: @AfshinMolavi