News that China and Iran will try to resurrect their oil and gas relationship mostly took back stage this week to the Royal Dutch Shell-BG Group mega-energy deal of the decade. As a plethora of analysts, commentators and both print and online pundits waxed eloquent over Shell’s proposed $70 billion buyout of the British gas producer, Iranian oil minister Bijan Zanganeh made a trip to Beijing. It was his first since taking office in 2013, and the agenda included discussions about oil sales and the resolution of differences between China’s state owned oil and gas companies and Iranian energy firms.
Iran’s arguably opportunist move came within days of a tentative agreement reached between the Iranian government and the so-called “P5+1” countries – the five permanent UN Security Council members plus Germany. These high-level international negotiations have resulted in a framework deal over Iran’s nuclear capabilities and uranium enrichment program. Andy Lipow of Lipow Oil Associates told CNBC that Iran was laying the groundwork for increased oil sales to China once the sanctions are lifted.
Before 2012 and the tightening of sanctions against Iranian oil exports, Iran – holder of the world’s fourth-largest proved crude oil reserves and the world’s second-largest natural gas reserves – was exporting around 2.5 million barrels per day, according to the US Energy Information Administration (EIA). After Western sanctions hit hard, Iranian oil exports plunged to just 1.1 million b/d. The largest buyers of Iranian crude and condensate are China, India, Japan, South Korea, and Turkey, according to the EIA.
The loss of oil revenue slowed Iranian economic and industrial growth, while the value of its currency, the rial, plunged against most major world currencies. It also became increasingly difficult for Iran to tap American and European funds for investments in new developments and pay for the equipment and services needed to keep its oil and gas facilities operating smoothly. Another major component of these developments includes China’s interests in the Iranian oil and gas sector.
One media report said that Chinese oil and gas companies stalled or scaled back on developments in Iran as far back as late 2010 amid Western sanctions. Various joint Chinese-Iranian projects, including state-owned China National Petroleum Corp.’s (CNPC) involvement in Iran’s massive South Pars natural gas project, have been cancelled in recent years. According to Iran, South Pars contains roughly over half of Iran’s total natural gas reserves at over 33 trillion cubic meters (Tcm). Amir-Hossein Zamaninia, Iran’s deputy oil minister for commerce and international affairs, said CNPC withdrew as sanctions made it difficult to get the equipment needed from US and European companies.
Other Iranian officials said this week that they were interested in jump starting the project again. Zamaninia added that Iran would focus on resolving issues with current contracts, adding that the two sides have yet to discuss any new projects.
While some may consider all of this activity between China and Iran a little premature since a final nuclear deal has not been reached, other analysts claim it backs the US into a corner. University of Maryland professor and economist Peter Morici said that with negotiations going on, the talks between Iran and China will be presented as an investigatory discussion – but one that puts pressure on the Obama administration to make a deal.
Morici also argues that China now provides Iran with a well-qualified customer and one possibly beyond the reach of any US sanctions. If Morici is right, and if the P5+1 members and Iran manage to finalize a deal, it may be the last time Washington can exert such influence on Iran, while at the same time providing China with a way to bypass what it often sees as Washington’s unwarranted meddling in international affairs, albeit its own affairs, while Beijing claims it can do business regardless of international politics.
