Iran complicates China's energy security
As China tries to secure the future of it's energy, it finds itself in a precarious position between Iran and the US.
y Michael Pinskur for The Power and Interest News Report (14/3/06)
In mid-February 2006, amid controversy over Iran's nuclear research program, China and Iran announced an energy deal potentially worth US$100 billion. According to the agreement, state-owned China Petroleum & Chemical Corporation, or Sinopec, will develop Iran's Yadavaran oil field, and China agreed to buy from Iran ten million tons of liquefied natural gas per year for 25 years beginning in 2009. Sinopec would assume a 51 percent stake in the field, expected to produce 300,000 barrels per day, with 29 percent going to India's Oil and Natural Gas Corporation (O.N.G.C.) and the remaining 20 percent to either Iranian firms or another foreign company such as Royal Dutch Shell.
China and Iran Improve Economic Relations
This deal is the latest and most significant step in economic relations between the two states. Trade between China and Iran increased from US$1.2 billion in 1998 to US$7.5 billion in 2004, and jumped to US$9.5 billion in 2005. China currently imports about 13 percent of its oil from Iran alone and, as consumption continues to rise, will be increasingly reliant on foreign oil. Additionally, Beijing has made recent significant energy investments in Indonesia, Venezuela, Sudan, and Nigeria, and plans to construct a pipeline connecting Iran to Kazakhstan, which would in turn supply China. [See: "Economic Brief: China's Energy Acquisitions"]
In Iran, China intends to become involved in everything from exploration, drilling and pipelines in order to meet its own increasing energy needs. Collaboration extends beyond energy, as there are presently more than 100 Chinese companies working in Iran in sectors such as dam and shipbuilding, steel production and development of seaports and airports. The Iranian Embassy in Beijing described this collaboration as "following the rule of mutual benefits and respect in all bilateral cooperation."
It appears that the two states wish to conclude the deal before any possible international sanctions on Iran are imposed. To do so would limit U.S. and E.U. options, and a Chinese veto, or the threat of one, at the U.N. Security Council will complicate Western aims to punish Iran. However, Beijing has stated its commitment to nuclear non-proliferation, and diplomatic resolution is "not only in the interests of China, but in the interests of all parties concerned."
Beijing Finds Itself Positioned Between the U.S. and Iran
There is much at stake, as China, Iran, and the West all stand to lose out from conflict, whether diplomatic or militaristic in nature. Beijing finds itself positioned precariously between Iran and the West, particularly between Iran and the U.S. Between 2001 and 2004, China accounted for one-third of the increase in global oil demand, and by 2020 expects its energy consumption to double, with imported oil accounting for 60 percent of the total.
China's dependence on energy would likely center on Africa and the Middle East, but with its expanding economy tethered to the U.S. and the dollar, China's further involvement with Iran could damage its relations with the U.S. In recent years, Beijing has stressed the point that it will not sacrifice trade with the West for Iran, and as such will toe a fine diplomatic line in order to maintain its relationship with both. [See: "China Becomes Increasingly Involved in the Middle East"]
Meanwhile, the U.S.-China trade gap swelled almost 25 percent to US$201.6 billion in 2005, a figure that has caused U.S. legislators to propose tougher trade policies against China. Last year, Congress helped to quash a hostile bid by China's C.N.O.O.C. to purchase Unocal, the ninth-largest U.S. oil company. This showdown proved that nationalism will trump the market when it comes to energy security, and that the U.S. and China, as the world's top two energy consumers, are ultimately competing for the same limited resources. U.S. Senator Joseph Lieberman asked that both sides "recognize this problem before it becomes an intense competition which can actually lead to military conflict." [See: "Economic Brief: Economic Nationalism"]
Washington Continues to Pressure Iran
With regard to Iran, U.S. Secretary of State Condoleezza Rice admitted that the U.S. must "walk a fine line" and will not likely push for immediate sanctions. However, Washington has hardened its stance in recent weeks, asserting that no level of uranium enrichment is acceptable. U.S. President George W. Bush called the row a "grave national security concern," but stated that a diplomatic resolution is imperative. As such, Washington's options are limited by its current military engagements in Iraq and Afghanistan, and by fear of a shock to global oil prices. [See: "Intelligence Brief: Iran Tests Washington's Limits"]
Iran is getting support from China and Russia who are attempting to limit sanctions or to forge a diplomatic resolution that will grant greater political leverage against the West. Iranian hardliners have stated that their country's economic relationship with China is "strategic," and that Western threats are empty. Russia's offer to enrich uranium for civil nuclear power in Iran is viewed as the best option for avoiding sanctions. The other Security Council members support the plan, but Iran has said it will not comply with the proposal. Both Beijing and Moscow believe that the matter should be determined by the I.A.E.A., rather than by the Security Council, and are fearful that forceful actions may well push Tehran away from negotiations entirely.
Iran, as O.P.E.C.'s second-largest oil exporter and with its position on the strategically crucial Strait of Hormuz, largely controls the climate of the current negotiations. Energy analysts predict that sanctions on Iranian oil would lead to skyrocketing crude prices that could potentially cripple the global economy. Worst-case scenarios envision U.S. military action that would lead to Iran cutting off its vast oil supplies, with prices at least tripling overnight. [See: "Intelligence Brief: Iran Tests Washington's Limits"]
Iran initially stated that it would not use oil as a weapon in the nuclear dispute. For instance, sighting the goal of keeping crude prices between US$50-60 per barrel, Iranian Deputy Oil Minister Mohammad Hadi Nejad-Hosseinian stated that, "Iran will not use oil as a weapon because we think it would have a very bad effect on most of the population of the world." He also predicted that sanctions would not be imposed on the grounds that such actions would have "very bad consequences."
However, in light of the I.A.E.A.'s referral, Iran reversed course by threatening to use its leverage as a key global energy supplier should the Security Council pursue drastic measures to halt the nuclear program. Indeed, Iranian President Mahmoud Ahmadinejad claimed that "the world needs the Iranian nation much more than the Iranian nation needs the world." As a result of the crisis, crude oil prices went up eight percent from mid-February, and anxious investors hope for a last-minute deal to calm the markets.
Conclusion
As the Security Council prepares to convene in New York, it can be expected that China will make every effort to avoid sanctions against Iran while attempting to mollify anxieties in the United States and Europe over nuclear proliferation. Iran will count on China's economic weight, and Security Council permanent member status, to counter Western desires to punish Iran. Meanwhile, Russia will continue to negotiate with Iran in order to settle the matter without official U.N. action. The U.S. and the E.U., on the other hand, will continue to push China and Russia to agree to some form of sanctions regime against Iran in an effort to force Tehran to comply with U.S. and E.U. demands.
This article originally appeared in Power and Interest News Report, PINR, at (www.pinr.com). All comments should be directed to content@pinr.com.
y Michael Pinskur for The Power and Interest News Report (14/3/06)
In mid-February 2006, amid controversy over Iran's nuclear research program, China and Iran announced an energy deal potentially worth US$100 billion. According to the agreement, state-owned China Petroleum & Chemical Corporation, or Sinopec, will develop Iran's Yadavaran oil field, and China agreed to buy from Iran ten million tons of liquefied natural gas per year for 25 years beginning in 2009. Sinopec would assume a 51 percent stake in the field, expected to produce 300,000 barrels per day, with 29 percent going to India's Oil and Natural Gas Corporation (O.N.G.C.) and the remaining 20 percent to either Iranian firms or another foreign company such as Royal Dutch Shell.
China and Iran Improve Economic Relations
This deal is the latest and most significant step in economic relations between the two states. Trade between China and Iran increased from US$1.2 billion in 1998 to US$7.5 billion in 2004, and jumped to US$9.5 billion in 2005. China currently imports about 13 percent of its oil from Iran alone and, as consumption continues to rise, will be increasingly reliant on foreign oil. Additionally, Beijing has made recent significant energy investments in Indonesia, Venezuela, Sudan, and Nigeria, and plans to construct a pipeline connecting Iran to Kazakhstan, which would in turn supply China. [See: "Economic Brief: China's Energy Acquisitions"]
In Iran, China intends to become involved in everything from exploration, drilling and pipelines in order to meet its own increasing energy needs. Collaboration extends beyond energy, as there are presently more than 100 Chinese companies working in Iran in sectors such as dam and shipbuilding, steel production and development of seaports and airports. The Iranian Embassy in Beijing described this collaboration as "following the rule of mutual benefits and respect in all bilateral cooperation."
It appears that the two states wish to conclude the deal before any possible international sanctions on Iran are imposed. To do so would limit U.S. and E.U. options, and a Chinese veto, or the threat of one, at the U.N. Security Council will complicate Western aims to punish Iran. However, Beijing has stated its commitment to nuclear non-proliferation, and diplomatic resolution is "not only in the interests of China, but in the interests of all parties concerned."
Beijing Finds Itself Positioned Between the U.S. and Iran
There is much at stake, as China, Iran, and the West all stand to lose out from conflict, whether diplomatic or militaristic in nature. Beijing finds itself positioned precariously between Iran and the West, particularly between Iran and the U.S. Between 2001 and 2004, China accounted for one-third of the increase in global oil demand, and by 2020 expects its energy consumption to double, with imported oil accounting for 60 percent of the total.
China's dependence on energy would likely center on Africa and the Middle East, but with its expanding economy tethered to the U.S. and the dollar, China's further involvement with Iran could damage its relations with the U.S. In recent years, Beijing has stressed the point that it will not sacrifice trade with the West for Iran, and as such will toe a fine diplomatic line in order to maintain its relationship with both. [See: "China Becomes Increasingly Involved in the Middle East"]
Meanwhile, the U.S.-China trade gap swelled almost 25 percent to US$201.6 billion in 2005, a figure that has caused U.S. legislators to propose tougher trade policies against China. Last year, Congress helped to quash a hostile bid by China's C.N.O.O.C. to purchase Unocal, the ninth-largest U.S. oil company. This showdown proved that nationalism will trump the market when it comes to energy security, and that the U.S. and China, as the world's top two energy consumers, are ultimately competing for the same limited resources. U.S. Senator Joseph Lieberman asked that both sides "recognize this problem before it becomes an intense competition which can actually lead to military conflict." [See: "Economic Brief: Economic Nationalism"]
Washington Continues to Pressure Iran
With regard to Iran, U.S. Secretary of State Condoleezza Rice admitted that the U.S. must "walk a fine line" and will not likely push for immediate sanctions. However, Washington has hardened its stance in recent weeks, asserting that no level of uranium enrichment is acceptable. U.S. President George W. Bush called the row a "grave national security concern," but stated that a diplomatic resolution is imperative. As such, Washington's options are limited by its current military engagements in Iraq and Afghanistan, and by fear of a shock to global oil prices. [See: "Intelligence Brief: Iran Tests Washington's Limits"]
Iran is getting support from China and Russia who are attempting to limit sanctions or to forge a diplomatic resolution that will grant greater political leverage against the West. Iranian hardliners have stated that their country's economic relationship with China is "strategic," and that Western threats are empty. Russia's offer to enrich uranium for civil nuclear power in Iran is viewed as the best option for avoiding sanctions. The other Security Council members support the plan, but Iran has said it will not comply with the proposal. Both Beijing and Moscow believe that the matter should be determined by the I.A.E.A., rather than by the Security Council, and are fearful that forceful actions may well push Tehran away from negotiations entirely.
Iran, as O.P.E.C.'s second-largest oil exporter and with its position on the strategically crucial Strait of Hormuz, largely controls the climate of the current negotiations. Energy analysts predict that sanctions on Iranian oil would lead to skyrocketing crude prices that could potentially cripple the global economy. Worst-case scenarios envision U.S. military action that would lead to Iran cutting off its vast oil supplies, with prices at least tripling overnight. [See: "Intelligence Brief: Iran Tests Washington's Limits"]
Iran initially stated that it would not use oil as a weapon in the nuclear dispute. For instance, sighting the goal of keeping crude prices between US$50-60 per barrel, Iranian Deputy Oil Minister Mohammad Hadi Nejad-Hosseinian stated that, "Iran will not use oil as a weapon because we think it would have a very bad effect on most of the population of the world." He also predicted that sanctions would not be imposed on the grounds that such actions would have "very bad consequences."
However, in light of the I.A.E.A.'s referral, Iran reversed course by threatening to use its leverage as a key global energy supplier should the Security Council pursue drastic measures to halt the nuclear program. Indeed, Iranian President Mahmoud Ahmadinejad claimed that "the world needs the Iranian nation much more than the Iranian nation needs the world." As a result of the crisis, crude oil prices went up eight percent from mid-February, and anxious investors hope for a last-minute deal to calm the markets.
Conclusion
As the Security Council prepares to convene in New York, it can be expected that China will make every effort to avoid sanctions against Iran while attempting to mollify anxieties in the United States and Europe over nuclear proliferation. Iran will count on China's economic weight, and Security Council permanent member status, to counter Western desires to punish Iran. Meanwhile, Russia will continue to negotiate with Iran in order to settle the matter without official U.N. action. The U.S. and the E.U., on the other hand, will continue to push China and Russia to agree to some form of sanctions regime against Iran in an effort to force Tehran to comply with U.S. and E.U. demands.
This article originally appeared in Power and Interest News Report, PINR, at (www.pinr.com). All comments should be directed to content@pinr.com.
posted by Marko at 3/14/2006 06:15:00 AM
<< Home