As the trade war continues to escalate, China is becoming
increasingly active in Iran and is considering retaliating with what has long
been described as the country’s ‘nuclear option’.
For the first of these projects - Phase 11 of the
supergiant South Pars non-associated gas field (SP11) - last week saw a
statement from the chief executive officer of the Pars Oil and Gas Company
(POGC) that talks had resumed with Chinese developers to advance the project.
Originally the subject of an extensive contract signed by France’s Total before
it pulled out due to re-imposed US sanctions on Iran, talks had been
well-advanced with the China National Petroleum Corporation (CNPC) to take up
the slack on development. As per the original contract, CNPC had been assigned
Total’s 50.1 percent stake in the field when the French firm withdrew, giving
it a total of 80.1 percent in the site, with Iran’s own Petropars Company
holding the remainder. At the same time, Iran was desperate to increase the
pace of development of the fields in its oil-rich West Karoun area, including
North Azadegan, South Azadegan, North Yaran, South Yaran, and Yadavaran, in
order to optimise oil flows ahead of further clampdowns on exports by the US.
China, though,
which at that time was engaged in just the opening shots of the trade war with
the US was loathe to completely disregard all US sensibilities when it came to
Iran but equally saw itself as a longstanding partner of the Islamic Republic,
not to mention always being cognisant of its need to ensure diversity of energy
supply. At that point, China agreed a trade-off with the US that in exchange
for it halting active development of SP11 it would be allowed to continue its
activities in North Azadegan and would be able to go ahead with its development
of Yadavaran – the second of China’s major Iran projects. China told the US
that its continued involvement in North Azadegan could easily be justified to
anyone else who might be interested – such as the mainstream media – on the
basis that it had already spent billions of dollars developing the second phase
of the 460 square kilometre field. Similarly, China said at the time, its
ongoing activities on Yadavaran could be justified by dint of the fact that the
original contract had been signed in good faith in 2007, way before the US
withdrawal from the nuclear deal in May 2018 and thus, legally speaking, it had
every right to go ahead.
The third of
China’s major as yet unfinished projects in Iran was the build-out of the Jask
oil export terminal, which – crucially, particularly in the current security
situation – does not lie within the Strait of Hormuz or even in the Persian
Gulf, but rather in the Gulf Of Oman. Even before the new US sanctions, the Kharg
export terminal was not ideal for use by tankers as the narrowness of the
Strait of Hormuz means that they have to go very slowly through it. With the
new sanctions in place and tit-for-tat tanker seizures regularly occurring,
China would have little choice but to put at least a couple of its own warships
into the Gulf to safeguard their passage or stop buying Iranian oil entirely,
neither of which Beijing particularly wants to do.
So, according to the plans, a US$2
billion or so 1,000 kilometre oil pipeline will connect Guriyeh in the
Shoaybiyeh-ye Gharbi Rural District, in Khuzestan Province (south-west Iran),
to Jask County, in Hormozgan Province (south Iran), with any financing required
over and above that provided for Iran to be made readily available from
China. Also to be constructed in Jask is an initial 20 storage tanks each
capable of storing 500,000 barrels of oil, and related shipping facilities, at
a cost of around US$200 million. Overall, the intention is for Jask to have the
capacity to store up to 30 million barrels and export one million barrels per
day of crude oil. There are adjunct plans to build a large petrochemicals and
refining complex in Jask as well, with the prime market for produced petchems –
including gasoline, gas oil, jet fuel, sulphur, butadiene, ethylene and
propylene, and mono-ethylene glycol - again being China. According to a recent
comment by the director of projects at Iran’s National Petrochemical Company,
Ali Mohammad Bossaqzadeh, the project would be built and run by Bakhtar
Petrochemicals Holding, although ‘other foreign companies’ may take part. In
fact, according to the Iran source, China has also offered to send as many
engineers and other professionals required in such a project to Iran for as
long as necessary.
Having said that, and aware of the
leverage that it had with Iran as one of the very few countries still willing
to engage in developing its fields in the midst of increasingly
vigorously-imposed sanctions, China has sought deal sweeteners from Iran, and
has been given them. In order for it to reactivate its development of SP11,
China will get a 17.25 percent discount for nine years on the value of all gas
it recovers. “This is the
value of the gas as applied to CNPC’s cost-return formula against the open
market valuation, and currently the net present value of the site is US$116
billion,” the Iran source told OilPrice.com. For its part, China
has agreed to increase the production from its oil fields in the West Karoun
area – including North Azadegan and Yadavaran - by an additional 500,000 bpd by
the end of 2020. This dovetails with Iran’s plan to increase the recovery rate
from these West Karoun fields that it shares with Iraq from the current 5
percent (compared to Saudi Arabia’s 50 percent). “For every one percent increase, the recoverable reserves
figure would increase by 670 million barrels, or around US$34 billion in
revenues with oil even at US$50 a barrel,” the Iran source said.
If there is any
further pushback from the US on any of these Chinese projects in Iran, then
Beijing will invoke in full force the ‘nuclear option’ of selling all or a
significant part of its US$1.4 trillion holding of US Treasury Bills, with a
major chunk of the paper due to be sold in September on this basis. This massive
holding of these bonds - through which the US finances its economy and is an
important factor both in the value of the dollar and therefore in the health of
US international companies especially – has been used as a bargaining chip
before by China, especially when it feels threatened. Back in 2007, just before
the great financial crisis, a number of senior Chinese figures at various
state-run think tanks – through which China often signals its big geopolitical
threats – stated that the large-scale selling of this massive Treasury Bill
holding would trigger a dollar crash, a huge spike in bond yields, the collapse
of the housing market and stock market chaos.
Such a tactic
would neatly fit into China’s overall strategy to have the renminbi challenge
the US dollar’s status as the key global reserve currency and the prime
currency for global energy transactions. “The long-planned sequencing for
this was inclusion in the SDR {Special Drawing Rights] mix, which happened in
2016, increasing use as a trading currency, which followed that, use as the key
currency of an international energy trading exchange, which has occurred with
the creation of the renminbi-denominated Shanghai International Energy Exchange
in last year, and the calls from big oil producers and other major trading
nations to use the renminbi, which has been happening over the past few years,”
the head of a New York-based commodities hedge fund told OilPrice.com. Only
recently, Leonid Mikhelson, chief executive officer of Russian oil major,
Novatek, said that future sales to China denominated in renminbi is under
consideration and that US sanctions accelerate the process of Russia trying to
switch away from US dollar-centric oil and gas trading and the damage from
potential sanctions that go with it. “This has been discussed for a while
with Russia’s largest trading partners such as India and China, and even Arab
countries are starting to think about it... If they do create difficulties for
our Russian banks then all we have to do is replace dollars,” he said. “The
trade war between the US and China will only accelerate the process,” he
added.
The trade
war with the US, though, may be the very reason why this policy is not
being pushed right now by China, Rory Green, Asia economist for TS Lombard told
OilPrice.com last week. “With the renminbi weakening, and set to reach 7.50
to the [US] dollar level if the US imposes 25 percent tariffs on all Chinese
exports, it is more difficult for China to persuade the big oil producers like
Russia, Iran, Iraq, Venezuela, to make the switch away from the dollar,” he
said. “For China as well, the timing is not quite right, as its use of
Eurodollar financing is currently significant, it has a lot of
dollar-denominated bonds rolling over shortly, and its balance of payments
needs a relatively healthy US demand profile, but China wants to get away from
the dollar system and that is the overall direction of travel,” he
concluded.
Source: RT