What Is China to Do About Iranian Oil?

China imports 11 percent of its oil from Iran, so the latest American and European move to isolate Iran has put Beijing in a quandary. Should China join the West with which it has close economic ties, or ignore the call for sanctions on Iran, not backed by the United Nations, to maintain its energy security? With the recent visit of Chinese Prime Minister Wen Jiabao to three oil-rich Gulf monarchies, Beijing deftly sidestepped the issue.

Wen highlighted the main principles of Beijing's foreign policy: non-interference in other countries' affairs, prioritizing energy security by ensuring steadily increasing supplies of oil and gas, and expanding trade. This set of guidelines has proved adequate, so far, to enable China to navigate the turbulent Middle East.

Wen described China's oil trade with Iran as "normal trade activity" in January in Qatar. "Legitimate trade should be protected, otherwise the world economic order would fall into turmoil." He spoke against the background of U.S. Treasury Secretary Timothy Geithner's Beijing visit to persuade Chinese leaders to "wean themselves off Iranian oil" and Washington's imposition of sanctions on Zhuhai Zhenrong Company, a state-owned Chinese oil corporation.

Liu Weimin, the Foreign Ministry's spokesman, said that "China's regular demand for energy does not have anything to do with the Iranian nuclear issue and should not be affected. To place one country's domestic law above international law and press others to obey is not reasonable."

China's stance contrasts with what the White House aims to achieve. Following Geithner's meetings in Beijing, a U.S. official explained that the Obama administration was "in the early stages of a broad global diplomatic effort to take advantage of this new legislation to significantly intensify the pressure on Iran" regarding its nuclear program. He was referring to the Defense Authorization Act, signed into law on Dec. 31, which targets foreign financial institutions doing business with Iran's central bank, notably to buy petroleum.

Referring to the Geithner mission, the Global Times, owned by an organ of the Communist Party, described it as another sign of America's "Big Power mindset," to be ignored.

Beijing is the largest buyer of Iranian petroleum, accounting for 20 percent of Iran's exports – the same as all 27 members of the EU combined. China's thirst for petroleum is rising so quickly that, according to Goldman Sachs, it will become the globe's largest importer of oil by mid-2013.

Iran became an early supplier of oil to China after Beijing decided to import it in 1993. A decade later China National Petroleum Corporation (CNPC) and Sinopec became involved in developing Iran's hydrocarbon resources. In November 2004, while Washington tried to get Iran's nuclear file referred to the U.N. Security Council, Sinopec and National Iranian Oil Company (NIOC) and Iran LNG signed memorandums of understanding for the development of the Yadavaran oil field, containing 3.2 billion barrels of oil and 2.7 trillion cubic feet of gas – the biggest hydrocarbon deal until then by an Organization of Petroleum Exporting Countries member.

In March 2008, while the Security Council imposed a third set of sanctions on Tehran, pertaining to nuclear and missile programs, China and Iran struck a three-year $3.39 billion deal to produce liquefied natural gas in Iran's mammoth South Pars field. Another deal with CNPC followed in January 2009. Later that year, Chinese companies inked $8 billion worth of contracts with Iran to help expand two Iranian oil refineries.

To overcome rising hurdles erected by Washington for Iran to conduct dollar-denominated transactions, Beijing and Tehran resorted to barter trade. In July 2011 they signed several agreements, committing Chinese corporations to invest in Iranian infrastructure projects, with Tehran agreeing to export chrome ore to China.

In pursuit of energy security, China's leaders decided more than a decade ago to reduce the proportion of its oil imports carried by tanker because of the vulnerability of shipping lanes from the Persian Gulf and East Africa to its ports. At present among China's top four oil suppliers – Saudi Arabia, Angola, Iran and Russia – only Russia is supplying nearly 400,000 barrels per day to China by pipeline. Of the remaining three, only Iran offers potential of overland pipelines.

A gas pipeline from Xinjiang province of China running through the Central Asian republics to Turkmenistan – already linked by gas pipeline to eastern Iran – was commissioned in December 2009. Two months earlier, in a meeting with Iran's first vice-president in Beijing, Wen referred to deepening cooperation in trade and energy between the two nations, adding that China attached importance to "close coordination in international affairs" with Iran.

Wen's statement reflected the consensus among a network of Chinese think tanks that Iran is a rising power in the Middle East, gaining influence at the expense of the U.S. Addressing the Fourth China-Arab Business Conference in Sharjah, Wen pointed out that the trade between China and the Arab world registered record figures in 2011 despite political turbulence.

China had good relations with Libya under Moammar Gadhafi. With Russia, it was angered by NATO's interpretation of the U.N. Security Council resolution in March, to protect civilians, by siding with anti-Gadhafi forces in the civil war. Within three months of Gadhafi's downfall, Beijing bought 67,000 barrels per day from the new regime.

During Wen's tour, Sinopec sealed an $8.5 billion deal with Saudi Aramco for a joint-venture oil refinery and signed a memorandum of understanding with Saudi Arabian Basic Industries Corporation to build a petrochemical plant in Tianjin, China. Saudi Arabia supplies almost twice as much petroleum to China as Iran. Beijing remains wedded to non-intervention in the domestic affairs of other countries. Along with Russia, it vetoed a Security Council resolution on Syria last October calling for sanctions against the Assad regime. Wen welcomed the Arab League's mediation efforts to defuse the crisis and appealed to the international community to play a constructive role.

He did the same when alluding to Iran, arguing that in view of "the instabilities and complexity in the region," the easing of tensions is "in the interests of all relevant parties." At the same time he declared: "China supports nuclear non-proliferation, and would be against Iran should it be developing or possessing a nuclear weapon." Given that China signed the nuclear Non-Proliferation Treaty in 1992, Wen's statement merely reiterated a long-held policy.

As a rising global power, China favors the region's status quo, gambling it can continue to fulfill its growing hydrocarbon needs from the Middle East, acquiring a larger footprint there while spurning the West's pressure to join its anti-Iran drive.