The Energy and Strategy of China–Iran Relations

17 November 2015 FDI Team

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Lindsay Hughes
Research Analyst
Indian Ocean Research Programme

 

Key Points

  • Iran possesses the world’s fourth-largest proven crude oil reserves and the second-largest natural gas reserves.
  • Iran has had an antagonistic dispensation towards the US since 1979.
  • These two factors combine to make the country an attractive one for China to seek to cultivate an economic and strategic relationship with it.
  • In exchange for energy products and to enhance its own regional and global influence, China has supplied Iran with the nuclear technology that has enabled it to seek to develop nuclear weapons, ballistic missiles and chemical weapons capacity.
  • Iran, however, is wary of losing its strategic independence and will not allow its antipathy towards the US to influence its relations with other countries.

 

Summary

Iran contains some of the world’s largest proven deposits of oil and natural gas. According to the US Energy Information Administration (EIA), Iranian deposits contain an estimated 157 billion barrels of crude oil and a further 1,193 trillion cubic feet of natural gas deposits, making them the fourth- and second-largest deposits in the world. This abundance of energy reserves makes Iran a very attractive source of energy for many developing countries, including China.

To maintain the economic growth that contributes to the legitimacy of its unchallenged rule, the Chinese Communist Party has purchased huge amounts of energy products from Iran for some time now. In return, it has transferred nuclear and chemical technology to Iran. While China protests that all its technology transfers to Iran comply fully with internationally-accepted laws and strictures, its support for the theocratic regime in Tehran has produced two basic outcomes. In the first instance, it has helped to support a regime that, minus this support, could potentially have collapsed by now since it does not enjoy the support of the entire Iranian nation. Second, in exchange for access to energy products, China has supplied Iran with the technology required to build ballistic missiles, nuclear technology and a chemical weapons capacity. This last has only served to further destabilise an already unstable region.

 

Analysis

The first recorded contact between China and the people of the region that now comprises Iran occurred during the journeys through Central Asia of the Chinese explorer, Zhang Qian, between 138 and 126 BC. Little surprise then, that when President Jiang Zemin of the People’s Republic of China (PRC) visited the Islamic Republic of Iran (IRI) in 2002, Iranian President Mohammad Khatami and he made much of the historical links between their countries. They did not, however, dwell too long upon that link, both being more concerned with contemporary imperatives: China’s seemingly insatiable (until recently) demand for energy products on the one hand and, on the other, Iran’s need for technology inputs and for new export markets for its energy products in non-Western countries. These forces have combined since that meeting to propel trade and co-operation between the two countries to increasingly higher levels.

Trade and Commerce

In 2013, two-way trade between the IRI and PRC reached US$39 billion and then soared by a further 72 per cent to nearly reach US$52 billion in 2014. In 2014, Iran’s exports to China were worth around US$27.5 billion and its imports from China amounted to some US$24.35 billion. Iran’s exports to China are obviously dominated by energy products. China imported 27.5 million tonnes of Iranian crude and condensate, an increase of 28.3 per cent over 2013. In the aftermath of the agreement between the US-led P5+1 and Iran, China’s crude oil imports from Iran reached over 500 thousand barrels a day; one estimate put that figure at rising to over 560 thousand barrels per day in July of this year. Iran expects to add a further one million barrels of oil per day by the (northern) spring of 2016. Speaking to his IRI counterpart, Hassan Rouhani, on the sidelines of the United Nations conference in September and in anticipation of the nuclear agreement between the P5+1 and Iran, PRC President Xi Jinping reportedly said that he wanted to “prioritise” China’s energy and financial co-operation with Iran. It is likely, therefore, that China could again begin to invest in Iran’s oilfields as it did previously. In 2004, for instance, China’s Sinopec Group signed an agreement with Iran that was worth an estimated US$70 billion to develop the rich Yadavaran oil field and to purchase 150 thousand barrels of crude extracted from the field per day for 25 years. The agreement also saw China purchase 250 million tons of liquid natural gas over 30 years from Iran. A week before the agreement between the IRI and the P5+1 was reached, Iranian officials travelled to China to discuss energy sales to China and investment in the energy sector in Iran.

The export and import of energy products does not, however, constitute the totality of trade between the IRI and PRC. China has constructed airports, paper mills, refineries and the Tehran Metro. Iran is also a key location in President Xi’s plan for the new Silk Road project.

Despite this, ties between the IRI and PRC are not without mutual suspicion. Both sides recognise that theirs, like China’s relations with Russia, is one of convenience. Tehran remains suspicious of the Chinese model of business; it does not wish to become so completely dependent upon China that it is forced to comply with Beijing’s every wish at a later date, as some countries in Africa that have dealt with Beijing have become. Tehran is also wary of the Chinese habit of not investing in the countries from where they purchase their raw materials. It may have been partly due to this suspicion and partly a need to demonstrate to China that they did not call the tune, embargo or no, that Iran cancelled a contract worth US$2.5 billion with the China National Petroleum Corporation (CNPC) for the development of the South Azadegan oil field. China, for its part, is only too aware of the dangers posed by Iran’s reluctance to comply with the terms of the nuclear agreement and the threat of the “snapback” of economic embargoes (including those on its energy exports) that hangs over it. Beijing could ill afford to increase its overall production in anticipation of the embargoes on Iran being fully and permanently lifted only to see them renewed due to Tehran’s failure to comply with the terms of the agreement. Beijing remains only too aware, furthermore, that Tehran does not have the level of control over Iranians that it has over Chinese citizens. Iran came close to seeing a revolution led by opposition figures against the theocracy in the wake of similar uprisings in Tunisia and Egypt that toppled the governments in those countries. Despite these reservations, however, China plans to pipe Iranian gas to the Pakistani port of Gwadar and from there to its western provinces. This is due to Beijing’s concerns over a potential blockade of its sea-borne energy imports at the Strait of Malacca. The Iran-Pakistan-China pipeline offers Beijing the means to diminish its “Malacca Dilemma”, reduce the dangers posed by India’s modernisation of its naval facilities in the Andaman and Nicobar Islands and its overall naval capacity, draw Pakistan further into its sphere of influence and, not least, balance India by providing Islamabad with the means to act as an efficient proxy.

The Strategic Value of the Relationship

China’s interest in Iran may be best gauged by its energy imports from that country, but it would be short-sighted to see that aspect of its relationship as the sole reason for its interest. Beijing’s desire to improve its relationship with Tehran has as much to do with its strategic ambitions as with its desire for commerce and trade.

President Xi’s pet project, the modern Silk Road Economic Belt, was proposed as early as 2011 by Wang Jisi, a Chinese strategist, to counter the US’s so-called “pivot to Asia”. In advocating this concept, Wang had three initial goals in mind: to secure China’s energy imports from Central Asia and Russia so as to reduce as much as possible the inherent risk posed by an estimated seventy to eighty per cent of its energy imports passing through the Strait of Malacca, to use energy pipelines that passed through its restive western Xinjiang Province as a basis to enhance the province’s economy and thus quiet Uighur separatists who have long fought Han occupation and who seek the creation of an East Turkestan state (the Uighur are ethnically Turkic) and, finally, to extend that prosperity and economic largesse to the countries of Central Asia, thus bringing them into China’s orbit and under its overall economic and political influence. A major overall goal of the Silk Road project, however, was to create a trading route from China to Europe and, over time, to extend China’s influence along that route and, possibly, into Eastern Europe.

Iran thus had immense geostrategic value in Beijing’s perspective by virtue of its geographic location and its suspicion of, first, the then USSR’s and, next, Russia’s motives towards it. Iran offers China an overland route to Europe that skirts the southern reaches of the Caspian Sea. This route, if developed, could offer China access to Europe that bypasses the Russia-dominated one that passes through Kazakhstan and then into Russia itself. Since Russia and China share a mutual suspicion – Russia will not easily cede influence to China in what it sees as its backyard and China sees itself as having more to offer the Central Asian republics than Russia currently does and is, moreover, suspicious of Russia’s motives in the region – Beijing will not take the northern route across Kazakhstan. It must, therefore, ensure that it has free and ready access to the southern one through Iran. China also recognises Iran’s historical suspicion of Russian motives in Central Asia and sees this as another reason why the southern route to Europe via Iran offers more security than the alternative.

By that reasoning, it makes sense, then, for China to attempt to ensure that Iran sees it as a possible ally as it emerges from the years of economic embargoes that were placed upon it by the West. Not surprisingly, after the energy agreement was signed between the IRI and PRC in 2004, then Chinese Foreign Minister Li Zhaoxing announced that China would veto any move to refer Iran’s nuclear programme to the United Nations Security Council. The message was clear: China would securitise the energy it required over an extended period and, in doing so, demonstrate to Iran that it was acting in Tehran’s best interests, thus making it a friend; Iran, for its part, could now see that it could depend on an influential friend.

This line of thinking has extended into arms sales to and military co-operation with Iran. Early this month, the head of the Chinese air force, Ma Xiaotian, called for closer relations with Iran’s air force during his talks with its chief, Hassan Shah Safi. While this could be seen as no more than an initial move to sell China’s JF-17 fighter aircraft to Iran, it must be noted that, in 2014, two Chinese warships docked at Bandar Abbas port prior to taking part in a joint naval exercise in the Gulf and an Iranian admiral was given tours of a Chinese submarine and warships. In October this year, furthermore, a senior Chinese admiral visited Tehran for discussions with Iranian officials.

China’s sales of arms to Iran is not a recent phenomenon, however. As a report from 1997 observed,

Since the mid–to-late-1980s, Chinese arms exports to Iran have caused considerable concern within the international community, particularly for the United States. Recently, in conjunction with the US-China summit of October 1997, China apparently took a number of steps to curtail sensitive transfers to Iran as part of a broader, more positive trend in Chinese non-proliferation policy. But numerous concerns persist that China continues to provide Iran with systems and technologies that contribute to further development of its cruise and ballistic missile capability, as well as to its nuclear, chemical, and biological weapons programs.

This was corroborated by a Rand report on China’s arms sales, which alleged that,

China has had extensive military relations with Iran. Beijing has sold thousands of tanks, artillery pieces, and armo[u]red personnel carriers to Iran, more than 100 combat aircraft, and dozens of small warships. Beijing has also sold Iran an array of missile systems and technology, including air-to-air missiles, surface-to-air missiles, and antishipping cruise missiles. Most worrisome have been China’s transfer of ballistic missile technology and its assistance with Iran’s NBC programs. Cooperation in these areas continued at a robust pace until at least 1997. In September 1996, China and Iran signed a deal whereby China would provide combat aircraft, warships, a variety of armo[u]red vehicles, missile and electronic equipment, and military training to Iran.

China, it would appear, now hopes to build upon the Iranian foundations it established many years ago.

Conclusion

The IRI-PRC relationship is very much one of mutual convenience. Iran recognises the pitfalls inherent in a relationship with China and is being careful to avoid becoming overly dependent upon it economically and/or strategically. China sees dealing with Iran as difficult but is constrained to attempt to further the relationship with Tehran for geostrategic reasons. It is very likely, therefore, that this relationship will last only until either country sees an equally good or better alternative. Both remain pragmatic enough to perceive the mutual benefit to be had by continuing with the relationship.

 

 

 

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