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Alternatives to Iranian oil

by Michael Richardson

SINGAPORE — Talks to defuse the brewing crisis over Iran’s nuclear ambitions ended inconclusively last weekend. The discussions in Geneva involving China, Russia, the United States and leading European powers were followed by a warning to Tehran that it had a fortnight to respond positively or face fresh sanctions.

To pave the way for substantive negotiations, the big powers offered to suspend moves to tighten sanctions in return for a commitment from Iran not to expand its uranium-enrichment activities any further.

Tehran insists the program is not for nuclear weapons but to produce fuel for atomic reactors to generate electricity. The five permanent members of the U.N. Security Council plus Germany regard agreement on their “freeze-for-freeze” proposal as a necessary step before talks with Iran on a wider package of economic and diplomatic incentives.

Iranian stonewalling continues to reinforce suspicions that it is trying to buy time while it pursues a clandestine bomb-making program and exploits differences among the key powers.

Perhaps the most important of these differences involves the web of ties that China and Russia have with Iran in energy, trade, investment and arms supplies. Yet, while Russia — a major energy exporter — has an interest in a simmering Iran problem that helps keep the U.S. preoccupied and the oil price high, China — a major energy importer — is suffering from the doubling of oil costs in the last 12 months. That has stoked inflation and forced the government to approve unpopular rises in gasoline, diesel and electricity prices.

Sometime this year, if it has not already happened, China will pass a milestone in its increasingly precarious effort to sustain energy security. More than half its crude oil will be imported and this dependence is forecast to rise to 80 percent in 2030.

Already, a big majority of China’s oil imports come from volatile areas of the Middle East and Africa, chiefly the Persian Gulf. This is an unsettling experience for China, which until 1993 was self-sufficient in oil, its main source of transport fuel for a rapidly expanding economy.

Foreign dependence is making China take a more intense interest in what happens in the Middle East and Africa. Since almost all the oil it imports from there is shipped in tankers to China via Southeast Asia, Beijing’s interest in the security of sea lanes and vital shipping straits — particularly the Malacca and Singapore straits, the South China Sea and the Taiwan Strait — will only increase in the future. Protection of energy supplies is also one of the factors drawing the Chinese navy into the Indian Ocean, to the alarm of India.

Nearly 45 percent of China’s crude oil imports come from the Middle East and over 30 percent from Africa. The two biggest Middle East suppliers are Saudi Arabia, with a 16 percent share of China’s oil imports, and Iran, with a somewhat smaller share.

Beijing has so far balanced its relations, on one side, with oil and gas-rich Iran and, on the other, with U.S.-backed Saudi Arabia and the other five Arab states of the Gulf Cooperation Council (GCC) on the western side of the Gulf, which worry about Iranian domination of region and the tumultuous consequences if Tehran gets nuclear weapons.

This balancing act will become harder for China to maintain in the future. The International Energy Agency expects that China will be relying on the Middle East for 70 percent of its oil imports by 2015, up from 44 percent in 2006. Most of the new oil is likely to come from GCC producers.

While GCC oil and natural gas development has been expanding in recent years, Iran’s has been increasingly constricted by a combination of bad policy and foreign sanctions that deny it Western investment and advanced technology.

Meanwhile, two-way trade and investment between the GCC and China is booming. In April, for example, the state-controlled energy giant PetroChina agreed to buy 3 million tons of liquefied natural gas from GCC member Qatar over 25 years in a deal worth at least $60 billion. Qatar’s foreign partner in the project is Royal Dutch Shell.

What could prompt Beijing to side more openly with the West and the GCC in the dispute with Iran? Of course, China, like Russia, does not want to damage its energy and commercial interests in Iran, which has the potential to become an even bigger exporter of oil than it is at present, and a huge exporter of gas, to Asia and the rest of the world.

However, continued Iranian intransigence may result in China tilting more firmly against Tehran. Beijing knows that Saudi Arabia — the world’s top oil producer and the only one with readily available surplus capacity — will remain a pivotal supplier for the foreseeable future.

In a sign of GCC concern about Iran, the Saudis reportedly offered earlier this month to buy Russian arms worth $2.4 billion if Moscow stops supporting Tehran. China and Russia have joined Britain, France and the U.S. three times since July 2006 in U.N. Security Council votes to sanction Iran for refusing to suspend sensitive nuclear activities. But at Chinese and Russian insistence, these sanctions are targeted against nuclear trade, not general commerce, arms sales or investment in energy projects and other sectors of Iran’s economy.

If Tehran refuses to accept the latest offer from the big powers, Beijing and Moscow will be under increasing pressure to back tougher measures.

Michael Richardson, a former Asia editor of the International Herald Tribune, is an energy and security specialist at the Institute of South East Asian Studies in Singapore.