China’s Relations With Saudi Arabia and Iran

To size up the relationship between China and the Middle East, first a few numbers: The volume of trade between China and oil exporting countries in 1991 was a mere $1.5 billion.

Since then, it has grown to about $17 billion in 2002 — and to about $37 billion in 2005.

It is possible that trade volume will more than double to about $100 billion by 2010.

China has also signed long-term trade agreements with Iran, valued at $100 billion, focusing on the importation of 10 million tons of liquefied natural gas over a 25-year period in exchange for a Chinese stake of 50% in the development of the Yadavaran oil field in Iran.

Twenty years ago, trade between China and the Cooperation Council for the Arab States of the Gulf (GCC) — plus Iran — was restricted to mainly arms and textiles in exchange for energy.

Today, China also exports automobiles, electronic goods, industrial machinery, cement and processed foods. Meanwhile, the investment projects funded by petrodollars both in Asia and the Gulf region are unprecedented.

China imports about 3.6 million barrels of oil per day — roughly half its consumption. But by 2025, imports are expected to reach about 11 million barrels per day — which is closer to 80% of expected consumption.

Half of China’s oil imports today come by sea — through the rather insecure Straits of Malacca. This proportion is expected to rise to about two-thirds by 2020 — and about 65% of imports come from Saudi Arabia and Iran. Oil, then, is a crucial element in China’s overall foreign and economic policy structure.

As a consequence, China has been endeavoring to secure larger flows of land-based energy imports — as well as looking beyond the Middle East to Africa for energy sources and other basic materials.

Accordingly, oil imports from Kazakhstan more than doubled in the first half of 2006 — and crude imports from Russia were up 36% over the year’s earlier period. In addition, China is developing port facilities in Pakistan’s Balochistan province at the mouth of the Persian Gulf.

China proposes also to build a pipeline to take Iranian oil several hundred miles north to the Caspian Sea. There, it would connect with a 3,000-kilometer pipeline between China and Kazakhstan, which was started in 2006.

The significance of all this has not been lost on geopolitical watchers. It is not just that China would prefer to get its oil overland. This project competes geopolitically with the Baku-Tblisi-Ceyhan pipeline, which takes oil from the Caspian Sea, north through Azerbaijan and Georgia to the Turkish port on the eastern Mediterranean.

More to the point, the Ceyhan pipeline was built to take the oil flow away from Iran — quite the opposite of what China has in mind with the proposed pipeline.

China has also undertaken several energy exploration agreements with the Saudi government, winning the right to explore for gas, for example, in Saudi Arabia’s al-Khali Basin.

For its part, Saudi Arabia has agreed to help China develop strategic petroleum reserves and to modernize downstream refining capacity — for example, with a deal to construct a refinery for natural gas in Fujian Province.

The investment projects exploiting the deployment of Chinese goods and technology in Saudi Arabia and other states are valued at hundreds of billions of dollars — and include not just predictable hydrocarbon deals, but also power generation, desalination and transportation.

Last but by no means least, while China is involved in about 120 energy exploration projects in the Middle East, Saudi Arabia is involved in a number of production and marketing investments in Guangdong Province involving petrochemicals — including for use in the local textile industry — and ethylene.

Although Iran is not a member of the Gulf Cooperation Council, it was long ago an integral part of the Silk Road and Sino-Iranian — or Persian, as it would have been — cultural and trade exchanges flourished.

Today, both countries value their sovereignty, status and independence — and both are aligned in believing in a global order that is “just” and not presided over by any hegemon.

As with Saudi Arabia, closer links were based originally on diplomatic exchanges and arms trade. For many years, commercial and military relations improved in spite of occasionally divergent policies, especially with regard to the United States.

But in the 1990s, several developments conspired to bring China and Iran closer. These included China’s conversion to a net oil importer, the country’s search for markets for household appliance and capital goods — as well as a temporary cooling of relations between the United States and China over Taiwan in 1995 to 1996.

China’s bilateral trade with Iran is much smaller than with Saudi Arabia, but grew from about $315 million in 1990 to roughly $9.5 billion in 2005, fuelled by growing Chinese investment in Iran’s infrastructure.

China and Iran have several areas of mutual commercial and strategic interest. The most obvious of course is in energy cooperation, given that Iran supplies nearly 15% of China’s crude oil imports and that it is a major gas producer, whose supplies China is eager to tap.

It has twice concluded 25-year agreements with Iran, in 2004 and one with effect from 2009, for gas supplies. Beyond that, Chinese firms have been active in both upstream and downstream energy developments in Iran — providing access to investment capital and technology.

Iran is keen to exploit these to advance a deep-level oil drilling ambitions in the Caspian Sea and upgrading Iranian refineries. Other areas where China has become increasingly active in, or with, Iran include the construction of oil and gas pipelines, shipbuilding, especially of oil tankers, and metallurgy, manufacturing and transportation infrastructure.

The international community will need to watch these relationships closely in the future as the need and demand for oil and new sources of energy increases — and China’s global position develops.