Analysts have warned that the crisis in the Middle East will push China closer to Russia, as Beijing faces the potential loss of cheap Iranian oil supplies and long-term disruption in energy markets.
China is the world’s largest oil and gas importer and depends on Iran for 13 percent of its crude imports. Overall, a third of China’s oil and 25 percent of gas imports pass through the Strait of Hormuz, through which shipments have been virtually halted as US-Israeli attacks on Iran have thrown the region into crisis.
As the conflict spreads across the Middle East, Beijing faces an unprecedented test of its years-long effort to strengthen economic security and insulate itself against energy supply shocks.
Chinese leader Xi Jinping’s government will probably be the first to consider building closer ties with Vladimir Putin’s Russia, experts and industry insiders said, despite Beijing’s misgivings about excessive dependence on its northern neighbor. Russia is already the largest source of crude oil for China, accounting for 20 percent of imports.
“A major outcome of this would be deepening energy ties with Russia – both crude and gas,” said Neil Beveridge, who leads Bernstein’s China energy research in Hong Kong.
“If Iran becomes a more pro-Western state, or they feel it will remain unstable for a long time, it will bring the alliance between Russia and China even closer,” he said.
China’s Foreign Ministry on Tuesday condemned the US-Israeli attacks and urged all sides to immediately end military operations, avoid escalating tensions and safeguard the security of the Strait of Hormuz.
It added: “China will take necessary measures to safeguard its energy security.”
China has bought large amounts of Iranian crude for years, a relationship that has helped keep Tehran afloat and supplied independent Chinese refineries, known as teapots, with the concessional product often relabeled as “Malaysian blended oil” to avoid US sanctions.
Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis, said the US-Israeli military campaign against Iran was “much more important” for Chinese energy than the US kidnapping of Venezuelan leader Nicolas Maduro in January. Venezuela’s share in China’s seaborne crude oil imports was only 4 percent.
He said Putin could pressure Beijing to pay higher prices for Russian oil and gas. “China is now in a weak position.”
Some efforts are already underway. An oil trader at a state-owned conglomerate in the eastern Chinese port of Ningbo said on condition of anonymity that China’s oil majors have been increasing Russian shipments in recent weeks. Traders also pointed to plans by state oil group CNPC to restart a mothballed oil refinery unit in Dalian, north-eastern China, which would further boost capacity to handle Russian imports.
In the longer term, the trader pointed to the emergence of Arctic trade routes as polar ice melts, which would open faster and cheaper shipping lanes for oil through Europe and increase volumes from Russia.
Analysts said Beijing would also consider accelerating plans to build the Power of Siberia 2 pipeline, which would supply natural gas from northwest Russia to Mongolia and China. The multibillion-dollar pipeline was expected to be built by the early 2030s.
More immediately, Xi’s administration will consider the use of oil reserves, analysts said, as Brent the international oil benchmark has risen 17 percent this week to about $85 a barrel.
The size of China’s oil reserves, which include the official strategic petroleum reserve and commercial reserves, is shrouded in secrecy, but is estimated to be between 1.1 billion and 1.4 billion barrels of oil.
This would potentially cover about 140 days of domestic oil import demand and is almost double the level a decade ago, after Beijing ordered a sharp increase in reserves over the past year.
Michel Meidan, head of China energy research at the Oxford Institute for Energy Studies, said that although it might take months of disruption to threaten oil supplies, the economic impact from higher oil prices would be “immediate.”
“Is it five days of oil at $100 (a barrel) or a month at $90? China has the ability to drive that down. The big question is the SPR – do they start using it as a way to mitigate the price implication?”
Given the uncertainty over the timing of Middle East deliveries, some Chinese refineries will slow operating rates, analysts said.
Ye Lin, Asia oil market analyst at Rystad Energy, said Beijing could take comfort from significant supplies from corporates and state-owned companies, as well as near-record shipments currently from Russia and Iran.
But he also said Beijing would look for ways to reduce its dependence on imports from the Middle East. “China needs to prepare more,” he said.
Natixis’ Garcia-Herrero said Beijing is now exploring all possible avenues for diversification.
For China, the Iran war underlines the importance of a decades-long campaign to achieve energy self-sufficiency through the electrification of its transportation and manufacturing base.
Cui Jingbo, co-director of the environmental research center at Duke Kunshan University near Shanghai, said the policy has already led to a boom in solar and wind power, battery storage and electric vehicles.
Now, the focus is on using China’s abundant and low-cost renewable energy and biofuels to decarbonize its vast industrial sector.
“This has been a strategy at the national level,” he said. “The government has predicted that there is going to be a regional conflict (in the Middle East).”
Additional contribution from Cheng Leng in Beijing. Data Visualization by Haosiang Co in Hong Kong
