Energy Bringing China and Iran Closer Together

Frederick W. Stakelbeck, FrontPageMagazine.com:

Iran is in the midst of a geopolitical transformation that has the potential to inflame the world’s most volatile and unpredictable region.

An integral part of this transformation is the nurturing of bilateral relations with countries sharing similar geopolitical interests and a strong resentment for perceived U.S. hegemony – China is such a country. READ MORE

Already China’s second largest supplier of oil behind only Saudi Arabia, Iran is ideally positioned to play a central role in China’s overall energy policy moving forward. Some energy observers predict that China will consume more oil than the U.S. and 75 percent of all new global oil production by 2015. This, as global demand for oil continues to grow at a pace not seen since 1980.

Fueling the global demand for oil, liquefied natural gas (LNG) and other forms of energy is an energy starved China. Imports of crude reached 130 million tonnes in 2005, up from a record 122 million tonnes in 2004. Most experts agree that China’s domestic oil and LNG supplies will be insufficient to meet its rising demand for energy in the very near future. As a result, Iran, one of the leading producers of oil and LNG in the world, has become a natural partner for China.

But unanswered questions remain concerning the budding relationship. What will Iran’s ultimate role be in China’s overall global strategy? How will the relationship evolve beyond energy? And could regional instability in the Middle East result from the China-Iran bilateral alliance?

Unsettling signs of energy-related stress are already evident throughout China, threatening the country’s plans for sustained growth.

Chinese Oil Shortages

Increased energy demands in China have caused oil supply shortages and inflation, crippling China’s vibrant Guangdong and Yunnan provinces. In Shenzhen City alone, over 128 gas stations were closed in August, as prices continued to spiral upward. Major cities such as Beijing and Shanghai have also felt the effect of gas shortages. In Heilongjiang Province, long gas lines have brought back memories of America’s gas shortages of the 1970’s with frustrated Chinese consumers wondering when it will all end. The frequent shortages have prompted some Chinese to ask if a nationwide energy crisis is unavoidable.

Complicating China’s energy woes, the Daqing oil field, one of the country’s most mature oil fields producing 900,000 barrels per day (bpd), saw its production decline by 5 percent in 2004. Recently, the Chinese government hired foreign energy firms to try and extend the life of its second largest field, Liaohe in northeastern China, as fears mount that the field will dry up in only a few short years.

These serious energy developments have led Beijing to increase its ties to Tehran. Recent statements released by the Chinese Academy of Social Sciences support the view that China will increase its oil dependence on the Middle East in the years to come, “It is an unarguable fact that China’s dependence on Middle East oil is increasing. Henceforth, the Middle East will be the most important supply source of international oil for China.”

Gavin Thompson, of British oil consulting firm Wood Mackenzie, recently noted, “China will never be able to satisfy its oil demand through foreign acquisitions. They are getting 55 to 60 percent of their oil imports from the Middle East. In the future, that proportion will only increase.”

China-Iran Energy Cooperation

The number of energy-related deals over the past year between Beijing and Tehran have been staggering. In late October 2004, a mega contract was signed by China oil giant Sinopec and Iran for an estimated $100 billion for the shipment of 250 million tonnes of LNG and 150,000 bpd of crude oil over a 25-year period. A subsequent $100 billion LNG deal is on the near horizon bringing the total investment package to an incredible $200 billion.

Adding to this impressive array of bilateral energy deals, China’s state oil trader Zhuhai Zhenrong Corp. agreed in 2004 to buy over 110 million tonnes of LNG from Iran over a 25-year period for $20 billion. Both countries also announced a joint tanker venture for the transport of LNG to China. Finally, a deal was struck in late 2004 between the two countries to build a refinery in Iran to handle 360,000 bpd of gas condensates. The project, which is expected to be completed in 2007 or 2008, is being financed by state-owned investment company China International Investment Trust Company (CITIC).

According to the Oil and Gas Journal, Iran is the second largest oil producer in the world with its 32 oil fields containing approximately 125.8 billion barrels (bb) of proven oil reserves, or 10% of the world’s total. In 2004, the country’s proven oil reserves increased to 132 bb after new oil discoveries were made in the Kushk and Hosseineih oil fields located in the Iranian province of Khuzestan.

To meet global energy demand, Iran is pushing forward with plans to increase oil and LNG production by investing $50 billion in its energy sector over the next several years. This level of investment is essential for the country’s economic growth, since oil proceeds account for 40 to 50 percent of government revenues.

Some energy experts believe that Iran could increase its crude capacity to meet the specific energy needs of China, but not without an enormous struggle. Iran has not exceeded 3.9 million bpd production levels since 1978/79. Plans announced by Iran’s Ministry of Oil to produce 5 million bpd by 2009 and 7 million bpd by 2024 have been termed “ambitious” by many in the oil industry.

In addition to oil, Iran possesses the world’s second largest reserves of LNG behind only Russia with 940 trillion cubic feet (Tcf) in proven natural gas reserves. Iran’s LNG production is expected to rise to 206 billion cubic meters (cm) in 2005; 342 cm in 2010; and 519 cm in 2025. Making opportunities for increased China-Iran bilateral energy cooperation even more plausible is the fact that many of Iran’s most promising gas fields remain unexploited. This presents China with enormous investment opportunities and new areas for cooperative projects, further cementing the bilateral relationship.

U.S. Concerns

Gal Luft, executive director of the Institute for the Analysis of Global Security recently noted, “Without a comprehensive strategy designed to prevent China from becoming an oil consumer on par with the U.S., a superpower collision is in the cards.”

Without question, closer energy ties between Beijing and Tehran will reduce Washington’s leverage on matters of economic, military and nuclear importance. Taken separately; China and Iran are formidable regional powers. However, taken together, they become a regional and global force. Add to the equation Chinese and Iranian joint cooperation in organizations such as the Shanghai Cooperation Organization (SCO), and confrontation with the U.S. becomes a distinct possibility.

China now sees Iran as its main strategic ally in the Middle East. Recent statements made by Chinese officials to world bodies such as the United Nations, European Union and International Atomic Energy Agency (IAEA) defending Iran’s uranium-enrichment activities prove that a closer relationship is rapidly evolving. “I don’t think IAEA talks will be helpful to bring the issue to the [security] council. The council has too many things on its table. Why should we add to this,” said China’s UN Ambassador Wang Guangya.

For those countries looking to challenge U.S. influence in the Middle East, U.S. Energy Secretary Spencer Abraham has a clear message, “Energy security is a fundamental component of [U.S.] national security. Military force will be an increasingly important prerequisite to safeguard the flow of foreign oil.” Simply stated, any independent or coordinated threat to the U.S. oil supply originating in the Middle East will be met by an overwhelming U.S. military response.

A U.S.-China Led Energy Summit

Will Iran become the “poison-tipped spike on the red dragon’s tail,” intoxicated by the prospect of reviving the past glory of the Persian Empire? Evidence is mounting that China is trying to cultivate a unique strategic relationship with Iran, while also expanding its influence throughout the Middle East.

Chinese President Hu Jintao has publicly stated that energy will be high on his agenda for his trip to Washington in September. President Bush should take this opportunity to propose a future U.S.-China led energy summit, inviting countries such as Japan, Germany, Great Britain and Russia to participate. This would be a constructive way to address the challenges presented by global oil dependency. It is in best interests of the U.S., China and the world to address the growing global energy crisis before the time for negotiation passes.