On battleground Iran, a crude China versus US standoff

Updated July 28, 2019

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An oil drilling rig of Iran's Azadegan oilfields is seen in this file photo.
An oil drilling rig of Iran's Azadegan oilfields is seen in this file photo.

AN interesting new variable is getting into the ‘crude’ play — its China versus the United States. And Iran is the battleground.

Almost three months have elapsed since the US slapped sanction on crude imports from Iran.

Washington’s intentions were clear. It wanted to bring Tehran to its knees. It wanted to bring down its crude exports to almost zero. But things don’t appear going that way. China is standing in between. Despite the US sanctions, Iranian crude continues to flow into China.

China has been a signatory to the 2015 nuclear agreement between the world powers and Iran.

When the US under Trump opted out of the agreement, China and other signatories objected to the move insisting it would be business as usual with Iran. But it was not to be easy.

Today, Beijing continues to defy Washington, rather deftly. In what appears to be a sheer gesture of contempt for the US sanctions, Chinese companies are continuing to import Iranian crude. But in order to avoid the US wrath, instead of reporting the imports from Iran, this imported crude is being stored in bonded storage tanks at Chinese ports.

This is rather interesting.

Oil is being shipped from Iran to China, but since it has not been through the customs, ‘as yet’, this won’t show up in the data. Strictly speaking, the oil is still technically “in transit” and is not in breach of the sanctions.

“Iranian oil shipments have been flowing into Chinese bonded storage for some months now, and continue to do so despite increased scrutiny,” Rachel Yew, an analyst at FGE in Singapore was quoted as saying by Oilprice.com. “We can see why the producer would want to do so, as a build-up of supplies near key buyers is clearly beneficial for a seller, especially if sanctions are eased at some point.”

Bloomberg ship-tracking data show there could be more Iranian oil headed for these massive tanks. At least ten very-large crude carriers and two smaller tankers owned by the state-run National Iranian Oil Company and its shipping arm are currently sailing toward China or idling off its coast. Combined, the vessels can carry some 20 million barrels. It’s widely believed that most of the oil is payment in an oil-for-investment deal, which is fairly common in China. Thus technically speaking, some of this crude, is owned by Chinese entities. They may have received it as part of oil-for-investment schemes. For example, a Chinese oil company could have helped fund a production project in Iran under an agreement to be repaid in kind. Whether this sort of transaction is in breach of sanctions isn’t clear, and so the Chinese companies are keeping it in bonded storage to avoid the official scrutiny it would get once it is registered with customs, according to sources.

Bloomberg has been tracking the discrepancy between the volume of Iranian crude shipped to China and the volume cleared by Chinese customs for months. China received about 12m tonnes of Iranian crude from January through May, according to ship-tracking data, versus about 10m tonnes that cleared customs over the period.

Several other Iranian-owned tankers offloaded in China or were heading there, according to ship-tracking data. VLCC Stream discharged at Tianjin on June 19, while Amber, Salina and C.

Infinity offloaded crude at the ports of Huangdao, Jinzhou and Ningbo. Tankers Snow, Sevin and Maria III were last seen sailing in the direction of China.

The US is keeping a close eye. In a clear warning, President Trump slammed sanctions on Chinese state-run energy company Zhuhai Zhenrong for allegedly violating restrictions imposed on Iran’s oil sector. The decision comes during a truce in the ongoing trade war between Washington and Beijing.

Although Zhuhai Zhenrong is a small entity, some see it as a warning by Washington to allies to get behind its Iran policy. US Secretary of State Mike Pompeo said the sanctions on Zhuhai Zhenrong and its chief executive Youmin Li are “part of our maximum pressure campaign” on Iran. “We’ve said that we will sanction any sanctionable behaviour and we mean it,” Pompeo emphasised.

China slammed the US decision. “We are opposed to the US bullying behaviour of wantonly cracking down, suppressing and sanctioning Chinese companies and individuals based on the US domestic law,” Hua Chunying, a spokeswoman for China’s foreign ministry was quoted as saying.

Crude is chipping in as a tool in the ongoing battle of nerves between Beijing and Washington.

Published in Dawn, July 28th, 2019