The conventional wisdom dictates that in order to feed its insatiable demand for resources, Beijing is happy to enter Faustian pacts with dictators to pillage their resources in return for money and arms. China’s unfortunate collateral involvement in an appalling genocide in Darfur made it a punching bag for international human rights activists. Beijing’s link with the erratic junta in Burma is giving the critics further ammunition.
China’s involvement in Iran is likely not only to incur the ire of human rights organisations but more importantly, the wrath of Washington’s administration. About three months ago, President Barack Obama signed one of the most severe sanction bills against Iran into law (H.R 2194), which prohibits any person or business from investing more than US$20 million in Iranian petroleum resources, a host of other export control measures, and in particular refined petroleum products that are in critical short supply in Iran.
US sanctions were followed by the EU and other Western governments. Global energy giants such as Shell, BP and Total have stopped sales of refined petroleum products. Even private Russian oil company Lukoil stopped delivering petroleum products and withdrew from a major oilfield project.
Tehran was incensed. It was isolated with very few friends to turn to. Apart from Moscow, Beijing seems like a logical choice, an emerging superpower with both money and appetite for Iran’s vast untapped resources. If there is anyone who can potentially help Iran to break free from the American stranglehold, China might just be the right one.
Following that logic, Iranian Oil Minister Masoud Mirkazemi and his deputy and the managing director of the National Iranian Oil Company, Ahmad Ghalebani, paid a pilgrimage to Beijing in early August this year.
Ali Fekril, an Iranian diplomat in Beijing told a Caixin journalist that although the oil minister met with the Vice-Premier Li Keqiang and senior executives from the Chinese state energy giants, there was no discussion of future cooperation and the only talk was about past projects.
China’s past investments in Iran involved careful toe-dipping and no daring plunge into the hot water of Middle Eastern energy politics. Chinese flirtations with oil projects in Iran were often reported as full-blossom China Inc love affairs with Tehran; but that was way off the mark. Early this year, Bloomberg reported that Iran and China signed a US$3.3 billion deal to produce Liquefied Natural Gas in the South Pars gas field. In fact, Bloomberg picked up a misleading report from the Iranian state broadcaster; a brand new deal was in fact nothing more than repackaging of an old deal as fresh new commitment.
In 2004, the much publicised US$100 billion joint-venture deal to develop the Ya-davaran oil field that was to deliver 10 million tonnes of LNG over 25 years to China never really took off. The Chinese only committed a fraction of the originally agreed amount and the project is still at the exploration stage. The government in Tehran only signalled the green light for the first stage of the project last November.
Even more mysteriously, the China National Offshore Oil Corporation’s (CNOOC) US$16 billion Memorandum of Understanding with Tehran was called off at the last minute just before the signing ceremony in 2008. The unconvincing explanation was that the Iranian oil minister could not be present to sign the deal. One can only speculate at the intense political jockeying behind the sinking of the deal.
There is very little doubt that the importance of Sino-American relationship features very prominently in the cautious approach adopted by the Chinese state energy giants in Iran. A recent paper by the Stockholm International Peace Research Institute on ‘New Foreign Policy Actors in China’, outlines the influence of Chinese firms and in particular energy companies on the deliberation of foreign policy in China as Chinese businesses expand overseas. But the other side of coin is that, although virgin oil fields in Iran and the absence of international competitors present an unprecedented growth opportunity for Chinese energy SOEs, these commercial interests are subjugated to Beijing’s foreign policy priorities and the priority of maintaining a good relationship with Washington at the very top of the list.
All three leading Chinese energy SOEs, China Petro, Sinopec, and CNOOC have listed their subsidiaries on the US stock exchanges, so Washington can directly punish their misdemeanours. For example, in July this year, the US banned China Petro from importing ‘blood oil’ from Sudan for processing in one of its refineries in China and, as a result, the production plan for the refinery was further delayed.
If the early Chinese venture into Sudan more than a decade ago was a reflection of inexperience in assessing sovereign risk associated with overseas projects, more recent Chinese activities in Iran represent a more cautious approach in dealing with regimes without international repute and a better understanding of political risk. China might enjoy a ‘comparative advantage’ in dealing with corrupt and internationally isolated regimes given China’s deep pocket and political clout, but Beijing must bear in mind that its key interest still lies in continued access to Western markets and avoiding long-term damage to China’s national and corporate image.
Justin Li is principal in the Institute of Chinese Economics and an associate of EAF.