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China Is Coming Out Of The Shadows To Defend Its Oil Interests

  • The seizure of oil tankers in international waters in the Gulf of Oman last week are not a standalone event.
  • China will not accept any interference from the U.S. in any aspect of its expansion across the Middle East.
  • China appears to have decided that the time is now right to come out of the shadows as far as its imports of crude oil from Iran are concerned.
Hormuz

Given the high stakes geopolitical game in which the world finds itself following Russia’s invasion of Ukraine last year, it would be naïve to be believe that anything as high-profile as Iran’s seizure of oil tankers in and around its coastal waters occurred in political isolation. They did not, and such seizures of vessels and other disruptions to the global oil markets emanating from the Middle East are set to continue. This is a key element of the new global oil market order as analysed in my new book on the subject. To recap briefly on these recent events, Thursday 27 April saw forces of Iran’s Islamic Revolutionary Guard Corps Navy (IRGCN) seize the oil tanker Advantage Sweet as it sailed through international waters in the Gulf of Oman. According to maritime shipping sources, the tanker was carrying an 800,000 barrels of Iraqi Ratawi crude oil cargo for the U.S. oil major Chevron, loaded at Kuwait’s Mina Saud terminal on 25 April. Just a few days later, on Wednesday 3 May, the same Iranian naval forces seized another oil tanker, the Niovi, after it had left Dubai for the port of Fujairah, also in the UAE, via the Strait of Hormuz. Although Iran alleges that this second seizure was pursuant to a legal dispute dating back to 2020 and involving Nimr International and Baslam Nakliyat on the one side and the Marshall Islands-based La Mere Maritime on the other, both seizures occurred after an earlier incident involving the U.S. This incident was the U.S.’s redirection of the oil tanker Suez Rajan, which was loaded with a full crude oil cargo destined for China, despite U.S. sanctions on the Iranian crude oil trade. 

Related: Turkey Makes Huge 1-Billion-Barrel Oil Discovery

It was, then, China that vouched the tacit support to Iran that enabled the IRGCN to seize the two oil tankers, according to a source who works closely with the European Union’s (EU) energy security apparatus and another with close ties to Iran’s Petroleum Ministry, both spoken to exclusively by OilPrice.com last week. “China wants to lay down a clear marker that it will not tolerate U.S. interference in any of its dealings with its major Middle Eastern allies, and Iran is at the top of this list, and this includes any U.S. interference in the flows of oil from Iran to China,” said the Iranian source. “China does not recognise the unipolar geopolitical economic order with Washington at the centre of it that the U.S. continues to try to impose on other countries, and it [China] will not tolerate the imposition of this idea against its [China’s] national interests,” he added. “China has the legal foundation to conduct such [oil] trade under the terms of the 25-year agreement made with Iran and has the right under the same agreement to protect its interests, regardless of arbitrary unilateral sanctions [on Iran] imposed by the U.S.,” he concluded.

Under the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’ first revealed anywhere in the world in my 3 September 2019 article on the subject, and analysed in full in my new book on the new global oil market order, China has wide-ranging access to several key elements of Iran’s energy, economic, and military sectors. Aside from first refusal on the exploration and development of all oil and gas fields in Iran, and huge discounts for China on the oil and gas produced from those fields, China also wrote into the Agreement several policies that allowed for much greater cooperation between the two countries’ militaries. One of these was the yearly exchange of dozens of senior officers of the two countries’ navies, armies, air forces, and intelligence units, plus technical personnel attached to special projects. Another was the ‘dual purpose’ – military and civilian - rights given to China for its navy and air force to utilise Iranian military and civilian sites for whatever purpose it required. 

Although no Chinese military personnel were directly involved on the ground in the recent seizures of oil tankers, the marker laid down by China through the IRGCN’s oil tanker seizures is clear enough. It demonstrates that China will not accept any interference from the U.S. in any aspect of its expansion across the Middle East, or in the oil and gas flows to China that accompany it. It also demonstrates that China has the capacity, through Iran especially, but also now through Saudi Arabia – as also analysed in depth in my new book on the new global oil market order – to significantly disrupt the movement of oil across the world. China, as it has made clear with these two latest oil tanker seizures, now has proxy control of the Strait of Hormuz through Iran. At least 30 percent of the world’s crude oil moves through the Strait at any given time, and often a lot more. The same 25-year Agreement also gives China a hold over the Bab al-Mandab Strait, through which crude oil is shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This has been achieved as it lies between Yemen - formerly heavily controlled by Iran-backed Houthis, but also now subject to the new China-brokered relationship deal between Iran and Saudi Arabia - and Djibouti, over which China has also established a stranglehold. What the seizure of the Advantage Sweet also now shows is that the Gulf of Oman can no longer be regarded as a safe alternative transport route for oil tankers either.

Although these latest seizures by Iran are primarily politically-motivated - aimed by China at showing that it will no longer tolerate any U.S. interference in its affairs – they also highlight that China does not see any immediate financial or economic fallout from the potentially higher oil prices that a higher risk premium would result in over time. In the 25-Year Agreement, China is guaranteed oil and gas prices from Iran at least 30 percent lower than the relevant oil pricing benchmarks. However, since the Russian invasion of Ukraine in February 2022, China has been demanding an extra discount on Iranian oil to the 30 percent discount at which it can currently also buy Russian oil, according to the EU energy security source. “On average, the Chinese discount for Iranian crude oil to the international benchmark over the last 12 months has been around 44 percent,” he said. “But, it is even worse for Iran, as – from 11 November 2022 - China has been paying Iran in non-convertible Yuan, that is Yuan that can only be used inside China and/or spent buying Chinese goods,” he added. “Worse still is that whilst Yuan is the key instrument in payment, China is also using the currencies of Angola, Zambia and Kenya to pay Iran, and China is doing this as a means to induce Iran to buys goods from these countries so that these countries, in turn, can service their loans to China,” he concluded.

It is interesting to note finally that China appears to have decided that the time is now right to come out of the shadows as far as its imports of crude oil from Iran are concerned. Previously, as also analysed in depth in my new book on the new global oil market order, China had disguised its huge oil imports from Iran in several ways. One of the most tried-and-trusted methods by which this has been done has been at source, with Iranian oil simply ‘rebranded’ as non- Iraqi oil. This has been easily done because the two countries share many of the same oil reservoirs. Another has been done at sea with oil cargoes already on the move, achieved by 

disabling – literally just flicking a switch – on the ‘automatic identification system’ on ships that carry Iranian oil. This can be accompanied by just lying about provenance, destinations or specific cargo types in shipping documentation. Iran’s own former Petroleum Minister, Bijan Zanganeh, publicly highlighted this very practice when he said in 2020: “What we export is not under Iran’s name. The documents are changed over and over, as well as [the] specifications.” On top of these, and very popular for Iranian oil headed to China in the past, was tankers bound ultimately for China engaging in at-sea or just-outside-port transfers of Iranian oil onto tankers flying other flags. As also highlighted in December 2018 at the Doha Forum, by Iran’s Foreign Minister, Mohammad Zarif: “If there is an art that we have perfected in Iran, [that] we can teach to others for a price, it is the art of evading sanctions.” China, though, no longer feels the need, or has the desire, to try to placate the U.S. 

By Simon Watkins for Oilprice.com

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Leave a comment
  • Dan Scott on May 11 2023 said:
    Great article. This is why U.S. O&G production needs to increase. Not just for our own energy independence, but also to supply energy to our allies. BRICS will soon include Iran and Saudi Arabia. With that alliance growing, we will need to assure European and Asian allies that they can rely on USA and Australia for oil and LNG supply. We can assume the BRICS alliance will leverage their supply to try and sway our current allies. The current US administration will not do this, because it contradicts the climate agenda.

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