Al-Monitor There is no doubt that the reimposed US sanctions on Iran will compel Tehran to shift more proactively toward deeper political and economic ties with Eastern powers. Here, China stands out not only as Iran’s largest trading partner, but also as the top buyer of Iranian oil — and hence the key player in filling the vacuum left by a withdrawal of Western companies from Iran.
At the same time, past experiences with Chinese petroleum sector companies have been disappointing for Iran’s technocrats. In fact, as recently as 2014, Tehran terminated the major Azadegan oil project with China’s CNPC due to dissatisfaction with progress made. The question is how the new circumstances in the aftermath of the US reimposition of sanctions will impact China’s role in Iran’s petroleum sector.
Post-revolutionary Iran’s international relations have been based on a complex set of drivers borne out of revolutionary ideals alongside security, economic and technological needs. Iran’s relationship with the European Union is a case in point. Indeed, despite all tensions and challenges, the EU has in the past three decades been the desired partner for the technological needs of Iran, and especially in the petroleum sector. However, Iran-EU economic ties have been challenged by ups and downs in the relationship, including the role that anti-Iran sanctions have played periodically. In fact, as a consequence of sanctions related to the nuclear standoff, China in 2010 replaced the EU as Iran’s most important trading partner. The expansion of Iran-EU trade since the implementation of the Joint Comprehensive Plan of Action (JCPOA) in January 2016, such as a 53% growth in 2017 compared with 2016 and further growth in 2018, was yet another indication that Iranian decision-makers still prefer European technology over that found in Asia. Nonetheless, the reintroduction of US secondary sanctions has undermined Iran-EU trade and investment, despite efforts by Europe to sustain the JCPOA. Consequently, Tehran will have to develop an alternative plan to fill the financial and technological gaps that a decline in relations with Europe will create.
Incidentally, there is a greater appreciation among Iranian elites that China is an alternative. Ali Khorram, a former ambassador to Beijing, said in early January, “There are many fields of potential cooperation between Iran and China — one of them being technology, where China does not have a high rank compared with the US and Europe, but could be a good trading partner for Iran. Also, in the field of investments, the two sides have to pave the way for greater cooperation.” At the same time, Khorram underlined that China does not view Iran as a strategic destination for investment.
These perceptions may explain why media reports emerged in January that China’s state-owned Sinopec had the previous month proposed to the National Iranian Oil Company (NIOC) that it invest $3 billion in Iran’s petroleum sector. While it is evident why Iran would welcome such a plan under the current circumstances, it is also important to assess China’s motivations.
One can see the Chinese initiative within a geopolitical context, namely how such a plan could bolster Beijing’s bargaining position against Washington in the current US-China trade negotiations. Others argue that China could use its existing and emerging projects in Iran to justify an extension of the so-called Significant Reduction Exemptions (SREs) to continue purchasing Iranian crude beyond the levels stated in current US sanctions waivers. For example, China’s CNPC has already received a waiver from the US government to continue working on its ongoing secondary recovery oil project in Masjed-e-Suleiman. In this scenario, continued SREs would then be justified to facilitate Chinese investors’ import of their own revenue share of Iranian projects in the form of crude oil, hence not generating additional revenues for Iran.
However, the most likely explanation for the Chinese proposal seems to be Sinopec’s improved bargaining position. Of note, it has been reported that Sinopec has presented the Iranian side with stringent demands, especially “to buy equipment of its choice — made in China — and request reimbursement for costs as soon as the new development undergoes testing, terms Iran normally refuses.”
It will be interesting to see whether Tehran will agree to these demands, which appear based on the assumption that the withdrawal of Western enterprises from the Iranian market has created a monopoly for Chinese companies. While some analysts agree with the latter assessment, actual events in Iran’s petroleum sector indicate that a different strategy has emerged. Indeed, NIOC has shifted its approach to the awarding of projects and has defined 33 projects — 29 onshore and 4 offshore — under the rubric of “Sustaining and Increasing Oil Production,” with a total investment value of $6.2 billion and a plan to add 280,000 barrels per day of oil production capacity.
All of these projects will be signed with Iranian contractors — including nine agreements signed Jan. 22. In many cases, the Iranian prime contractor will look for foreign technology partners who could help with engineering and procurement within the project’s framework. The objective here will be to get the local contractors to identify and engage foreign — and especially European — engineering and procurement companies as project partners in order to facilitate the availability of needed technologies. Iran’s Ministry of Petroleum will also use local bonds to finance these projects in order to sustain a minimum of development in the petroleum sector.
Nonetheless, small projects managed by domestic contractors won’t be enough to materialize the massive potential of the country’s energy sector. This is why Chinese as well as Russian and other Asian investments will be needed. It is also important to underline that Iran has confidence in Chinese capabilities in a number of sectors, including telecommunications and infrastructure projects. Iran already features strongly in China’s Belt and Road Initiative, which involves various planned Chinese infrastructure investments. In January 2018, Deputy Minister of Finance and Economic Affairs Mohammad Khazaei — who is also the official in charge of attracting foreign investment — outlined the significance of Chinese investments in Iran, saying, “Today’s China is different from the China of 15 years ago.”
As such, economic and investment relations will be part and parcel of Iran-China relations in the future. China’s strategic goal of securing energy resources for its future demands and Iran’s need for foreign investment will likely pave the way for a greater Chinese role in the Iranian energy sector. However, a growing Chinese presence, and especially under conditions that will sacrifice the technological quality of the Iranian petroleum sector’s development, will clash with Tehran’s desire to create domestic capacities and become a technological power in its own right. Consequently, Iran will continue to carve out a role for European engineering firms, hoping that Chinese investment can be combined with European technology to develop the country’s crucial energy sector. Nevertheless, it is also clear that the continuation of US pressure on Iran will weaken Iran’s bargaining position and will thus consolidate the footprint of Chinese companies in the Iranian economy — with all of its technological and political consequences.