China Frets Over Iran Oil

Reliance on Persian Gulf worries Beijing.
An analysis by Michael Lelyveld
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Iranian President Mahmoud Ahmadinejad (C) tours an oil refinery in Abadan, May 24, 2011.
Iranian President Mahmoud Ahmadinejad (C) tours an oil refinery in Abadan, May 24, 2011.

After years of trying to develop new oil sources, China may be more dependent on Persian Gulf exports than at the start of the second Iraq war.

While China's inflows have nearly tripled since 2003 and its list of suppliers has doubled, its reliance on Persian Gulf sources for imports has grown from 42 percent to over 50 percent, according to a RFA review of customs data.

The figures suggest China would suffer major disruptions and economic damage in the event of a conflict with Iran or a blockage of the Strait of Hormuz, which Tehran has threatened if more sanctions are imposed.

As Iran's biggest customer, China would face the loss of over 570,000 barrels per day (bpd) from that country alone, equal to nearly 11 percent of its imports last year.

In the case of a total Persian Gulf cutoff, China's shortfall could top 2.6 million bpd, or 28 percent of its total supply including domestic output.

Although China opposes U.S. sanctions against financial transactions with Iran, its position would not insulate it from a supply shock if the Strait's normal daily flow of 17 million barrels comes to a stop.

"Ultimately, they're in the same boat," said Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research. "This is a market issue, not a national supply issue."

Some of the Gulf's oil could be rerouted through pipelines to bypass the Strait, but the rush for supplies could push prices over 1,260 yuan (U.S. $200) per barrel, Herberg said. World economies, including China's, would suffer a steep drop.

"There would be just a catastrophic price effect," said Herberg. "If it lasts for very long, it's going to undermine economic growth."

China would try to soften the blow by ordering state companies to sell fuel at a loss, but the costs would be too great to keep the shock from shaking the economy, he said.

Reliance on Gulf oil

Some indicators suggest China could be hit harder than many other economies because it has depended on Iranian oil and failed to reduce the Gulf's share of its imports.

By contrast, the United States buys no oil from Iran, while all Persian Gulf sources account for 21 percent of imports. The top exporter to the United States is neighboring Canada, according to Department of Energy data.

Last year, the Iranian share of China's imports was down only slightly from 2003, when it stood at 13.6 percent. Iran's daily volumes to China have more than doubled since then.

China has been Iran's biggest oil market, accounting for 22 percent of its exports, Reuters reported. The energy ties would spell trouble for China in the event of a sudden break.

On Jan. 14, Premier Wen Jiabao flew to the region for visits to Saudi Arabia, the United Arab Emirates and Qatar on a trip widely seen as an effort to secure alternate supplies.

During Wen's stop in Riyadh, Saudi oil company Aramco and China's Sinopec hailed an $8.5-billion joint refining venture that will process 400,000 barrels of crude per day, the official English-language China Daily said.

Speaking at the end of his six-day trip, Wen told a press conference in Doha that he was unconcerned by shutdown threats, although the Strait should be kept open "under all circumstances."

"I don't have this or that worry about China's oil supplies, and this time I didn't discuss this issue with the leaders of each country," he said in comments cited by Reuters and the Foreign Ministry website.

But China would still find large volumes, like those from Iran, hard to replace.

"The Chinese can't physically make up for that. They're going to have to go into the marketplace like everybody else and pay for that oil at whatever price," Herberg said.

Billions invested

Since 1997, China has invested billions of dollars in dozens of countries to develop foreign oil production. Last year, China National Petroleum Corp. held shares in overseas oil and gas fields that produced the equivalent of 2 million bpd, Bloomberg News said, citing the company.

But China would be unable to boost supplies from those sources quickly to offset a big Persian Gulf loss.

"They cannot get enough incremental supplies from their other suppliers," said Herberg. "No matter how much they've invested in Sudan, Kazakhstan, Venezuela and elsewhere, that's lunch money compared to what the outage would be if you had a severe cutoff in the Strait."

Speaking in Abu Dhabi, Premier Wen called for a new international mechanism under the G20 group of countries to "stabilize oil and gas markets," China Daily reported, but the proposal provided few details.

While China has resisted further sanctions on Iran for its nuclear activities, it has bargained for lower oil prices, CNNMoney said. But reports of a major slowdown in China's intake of Iranian crude have not been borne out by customs reports.

Last year, China raised its imports from Iran by over 30 percent, including a 40-percent increase in December from a year earlier, according to customs data. Monthly imports from Iran declined only 4.5 percent from November.

China's total imports of 5.1 million bpd rose 6 percent from a year before.

On Jan. 14, China's Foreign Ministry voiced "strong dissatisfaction and firm opposition" after the U.S. State Department announced sanctions against oil trader Zhuhai Zhenrong Corp. for brokering delivery of over $500 million worth of fuel to Iran in violation of curbs imposed in 2010.

A spokeswoman said the company imported 12 million tons per year (240,000 bpd) of Iranian oil under contract, but denied it exported gasoline to the country, the Financial Times reported.

Oil reserves

If a Persian Gulf cutoff comes, China would be able to buy some time by using crude from its strategic oil reserve, which it has been building since 2006. But details of the available inventory have been imprecise.

Unlike the United States and other members of the Paris-based International Energy Agency (IEA), China has not issued regular reports on how much oil it has stored, often confusing capacity, consumption and import rates.

Erica Downs, a fellow in foreign policy studies at the Brookings Institution, said reports have differed on the level of China's reserves.

But at least two reports in the second half of last year estimated strategic stocks at 178 million barrels and commercial inventories at another 168 million, Downs said in an e-mail message.

If the estimates are accurate, the combined total could replace 68 days of China's crude imports at current rates.

Last March, China's National Business Daily reported that the stockpile's capacity "is enough for one month's use," quoting the State Bureau of Material Reserve.

But in November, the Financial Times said the reserve had a little more than 110 million barrels on hand. That would cover imports for only about three weeks.

IEA rules require members to store 90 days of emergency supplies. At the end of November, the U.S. Strategic Petroleum Reserve held nearly 696 million barrels of crude, equal to 79 days of imports.

U.S. commercial stocks of 334 million barrels could cover an additional 22 days of imports, according to calculations based on Department of Energy reports.





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