Giving in to Washington on Tehran — tough & difficult for Beijing

CHINESE demand is surging — and surging rather rapidly — and the focus is shifting fast. Beijing’s emergence on the global political and economic horizon is very much dependent on easy access to crude. And the issue of supply security has thus assumed a major strategic goal for Beijing.

There are indeed reasons for the Chinese quest for supply security. With demand in the developed world stagnating, the emerging Chinese consumption pattern is giving a completely different picture. And this is making Beijing the new focus of attention of the producers too.

Last year China imported 204 million tons of crude oil, up 13.9 percent from a year earlier. Its January crude imports of 17.11 million tons, was a significant 33 percent higher than a year earlier. And in December last year too its imports hit a record 21.26 million tons, up 47.9 percent year-on-year.

And Chinese imports are likely to go up by 9.1 percent this year, a just released report by China National Petroleum Corp. (CNPC) projected.

And this is despite the fact that China is already the world fourth largest crude producer, replacing Iran from the slot in 2009. The Chinese oil output in 2009 accounted for 5.4 percent of the world’s total, following Russia, Saudi Arabia and the US. China’s 2009 domestic oil output reached 189 million tons. However, this domestic output accounted for just 48 percent of its 2009 demand.

Analysis of Chinese crude imports makes interesting reading — emitting political signals. Last year, Saudi Arabia, Angola and Iran were the three largest source of crude to China, with its imports from the three standing at 41.86 million tons; 32.17 million tons and 23.15 million tons, respectively. Saudi Arabia, the largest of these accounted for 20.5 percent of China’s total imports in 2009. Angola shipped 15.8 percent while Iran contributed 11.3 percent.

Of course the Saudi focus shift to China and other emerging markets is now an established fact. Already China is the biggest market for Saudi crude — and indeed this could have long-term geo-political implications too — none could dare deny.

However, Iran also has a significant share of the Chinese cake. And this becomes all the more interesting, when seen in the wake of the growing US impatience with Iran. Can indeed Beijing shun Tehran?

Indeed before responding positively to Washington’s clamor for a joint, tough line with Tehran, Beijing will have to give serious thought to the following. For China, approving crippling sanctions against Iran means in all probability the loss of 10 percent to 12 percent of its oil imports, the aborting of some $80 billion in development projects by Beijing in Iran, the sacrifice of hundreds of billions of dollars worth of oil which the Chinese have locked in via futures contracts, and, above all, a farewell to the best chance of getting a secure overland gas pipeline far away from the US-UK fleets — the pipeline from Iran via Pakistan into China.

It is definitely not going to be easy.

In mid-January, China National Petroleum Corp. (CNPC) signed a 25 year buyback binding contract with National Iranian Oil Co. (NIOC) to develop onshore North Azadegan oil field. CNPC also has an MOU with NIOC to develop South Azadegan oil field, giving CNPC a 70 percent interest in South Azadegan. The project reportedly will need up to $2.5 billion worth of investments, of which CNPC is expected to pay $2.25 billion.

And the other top name in the Chinese crude equation — from supply side — is Angola. This is interesting, indicative of Chinese long-term interests in acquiring energy assets all over the world — and especially in the oil rich Africa. In addition to buying assets, China has offered $57 billion total in loans to several producing countries. China introduced the concept of loans for oil in 2004 by providing Angola with a $4 billion oil-backed loan for energy, infrastructure, and other projects. Subsequently, China made a series of loans to Angola, currently exporting about 40 percent of its production to China.

China also has made loans to companies in Venezuela, Russia, Kazakhstan, Brazil, Turkmenistan, Bolivia, and Ecuador in exchange for long-term oil and gas supplies. Those countries could repay the loan through revenues from oil sales by selling upstream assets to Chinese oil and gas companies or through supplying crudes to China.

How important is security of supplies to the Chinese strategy, could be gauged from the fact that Chinese oil and gas companies have boosted their investments abroad since 2008 despite the global economic downturn, having committed billions of dollars into the sector.

FACTS Global Energy, based in Singapore said in a recent report that China’s equity (net) oil production from its overseas operations in 2008 was 900,000 bpd and it is expected to reach 1.2 million bpd this year. The FACTS analysts forecast China’s net overseas oil production at 1.7 million bpd by 2015 and 2 million bpd by 2020.

China National Petroleum Corp. is the biggest investor among Chinese companies since late 2008. CNPC and its subsidiary, PetroChina Co. Ltd., currently are involved in more than 90 overseas projects, of which 65 involve oil or gas production and development. CNPC is heavily involved in Iran and Iraq. CNPC-PetroChina, already heavily involved in Kazakhstan and Turkmenistan, is looking to invest more in Russia, both in upstream and in pipelines.

The company and its subsidiaries hold stakes in oil and gas assets in 27 countries and provide field services, engineering, and construction in 49 countries worldwide.

China National Offshore Oil Corp. (CNOOC) follows CNPC-PetroChina in its overseas investment while China Petroleum & Chemical Corp. (Sinopec) is third among Chinese companies in its international holdings. And only a few days back, CNOOC had advanced to first in line in the contest among oil companies to acquire a stake in Ugandan assets owned by Tullow Oil.

In addition, the Chinese state oil trading company Sinochem Group too has begun investing abroad. Separately, the State Administration of Foreign Exchange and China Investment Corp. (CIC) also are acquiring interests in overseas ventures.

An all out effort indeed — and it is in this view that one feels it may not be easy for Beijing to readily comply with Washington’s request on Tehran.