China to Juggle Iran Oil Need With Saudi Ties

China's Wen Jiabao must balance his country's need for Iranian crude with its budding energy partnership with Saudi Arabia on his first visit to the Gulf kingdom, a U.S.-based specialist in Middle East security said.

The Chinese premier's trip tomorrow comes amid signs that tighter economic sanctions may stop Iran, OPEC's second-largest producer after Saudi Arabia, from selling its oil. Wen will also visit Qatar and the United Arab Emirates, fellow members of the Organization of Petroleum Exporting Countries, during a Persian Gulf tour ending Jan. 19.

"China seems quite reluctant to get on the wrong side of Iran given the tensions existing in the region and Iran's importance for its oil," Paul Sullivan, a political scientist specializing in Middle East security at Georgetown University in Washington, said in a Jan. 11 e-mail.

Wen will become the most senior Chinese leader to travel to Saudi Arabia since President Hu Jintao in 2009. His visit will begin as Saudi Arabian Oil Co. and China Petroleum & Chemical Corp. (600028) sign an agreement for a proposed refinery on the Red Sea coast. Sinopec's planned 37.5 percent stake in the Yanbu plant would make it China's first investment in a Saudi oil facility.

Europe and the U.S. are weighing more stringent sanctions against Iran over its nuclear program, with the European Union planning to decide on Jan. 23 whether to ban purchases of Iranian crude. China is the biggest importer of Iranian crude, buying 22 percent of Iran's oil in 2010, according to the U.S. Energy Information Administration.

China's Concern

While China has voted for four rounds of United Nations sanctions on Iran, its leaders have criticized separate efforts to expand U.S. and European curbs. Vice Foreign Minister Zhai Jun told reporters on Jan. 11 in Beijing that China needs oil for its development and hopes imports won't be affected.

Wen may ask for Saudi Arabia to tap some of its spare production capacity to keep markets supplied in the event of an embargo of Iranian crude, Georgetown's Sullivan said. "China has to walk a very fine line in the Gulf and has to work within very complex nuances and political and economic landmines in the region," he said.

The recent weeks of anxiety over Iran have already added about $10 a barrel to the cost of European benchmark Brent crude, Kamel al-Harami, an independent oil analyst, said on Jan. 6 by telephone from London. Brent crude futures for February delivery traded at $114.41 a barrel, up $2.17, at 3:29 p.m. in London yesterday.

Saudi Supply

"Some countries are trying to get a pledge that Saudi Arabia would replace Iranian crude," Olivier Jakob, managing director of Zug, Switzerland-based consultant Petromatrix GmbH, said in a Jan. 11 phone interview. "The Saudis have been saying they don't want to enter into the politics of the issue and are keeping the line that they will supply what the market needs."

Saudi Arabia's cabinet said on Jan. 9 that its policy for oil sales is managed "purely on commercial grounds," according to the official Saudi Press Agency.

For China and other energy importers, the reliability of shipments from Saudi Arabia and other Gulf suppliers has itself become a concern since Iran threatened last month to block the Strait of Hormuz if prevented from selling its crude. The strait at the mouth of the Gulf is a bottleneck for a fifth of all oil traded worldwide, or almost 17 million barrels a day, the U.S. Energy Department said in a report on Dec. 30.

Japan Affected

Japan met with a positive reception when it asked producers in the Gulf to increase oil supplies, Japanese Foreign Minister Koichi Gemba told reporters during a Jan. 10 visit to Abu Dhabi. Japan bought 9 percent of its imported oil from Iran in the first 11 months of last year, according to data from Japan's Ministry of Economy, Trade and Industry. Saudi Arabia supplies roughly a third of Japan's imported crude, the data show.

Wen, who plans to give a speech about China's energy policy at a conference in the U.A.E. capital Abu Dhabi, will be "looking for further guarantees" of energy shipments from the Gulf, said Theodore Karasik, director of research at the Dubai- based Institute for Near East and Gulf Military Analysis.