What Should Iran Ask from China?
Part 6 (Oil Trade)
An Iranian minister visits China in January of 2022 to sign a 25-year economic plan between Iran and China. As he returns, there is an unsolved question in his mind: “What should we ask from China?”
Well, this article tries to answer that question.
In my previous article I tried to emphasize contributions that China could have on Iranian Embassies and Trustees. Here I expand what Iran could ask from China on Oil Trade.
Oil Trade
China is the largest buyer of oil in the world. China seems to be ahead of the rest of the world in terms of recovery from Covid-19, and some experts believe that China’s overall demand for oil should reach pre-virus levels by the end of the year 2022. In contrast, according to the latest forecast of the International Energy Agency, global oil demand is not expected to fully recover by the end of 2022. From what we know, Chinese purchase of discounted Iranian oil reached its highest level in 2021. In the last months of 2021, Iran has shipped 17.8 million tons of crude oil to China. Three-quarters of these shipments were “indirect” imports considered to be from Malaysia, Oman or the United Arab Emirates that entered China mainly through ports in Shandong and Liaoning provinces.
While there are obvious commercial incentives for Beijing and Tehran to strengthen their bilateral relations, limitations and challenges remain. China attempts to diversify its ties with the Persian Gulf countries, but is also reluctant to make economic or geo-political commitments. Although, Iranian oil is only one of many sources for China, accounting for 3% of China’s oil import is not among the top suppliers. Even though concluding a bilateral agreement like a 25-year plan may increase the volume of Iranian oil export to China, Beijing is likely to be cautious about expanding its relations with Iran. Furthermore, China has created its top two oil partners in the Persian Gulf, Saudi Arabia and Iraq.
Suggestion
Now, these two countries have a long trading history. According to OEC, in 2019 alone, China imported $204 billion worth of Crude oil and iron ore to the tune of $83 billion which is a perfect match for Iran’s light crude oil export capability of 2 million barrels per day valued at $12.3 billion and $1.06 billion iron ore annually.
The current pricing model of Iranian crude oil is based on a traditional method, and the experience and trust of experts in the International affairs department within the National Iranian Oil Company (NIOC). In this model, transparency is minimized. And lack of transparency is exasperated with sanctions in place allowing unchecked and ill-advised discounts and concessions. Consequences of such mismanagement have become evident during the past decade as the number of barrels needed to meet Chinese demand have not reached the desired level, leading to inevitably being replaced by Venezuela, Saudi Arabia and Russia who have risen to the occasion.
To help save itself from the potential grim future, over the past several years, NIOC has made arrangements to combine oil products with condensate and change the oil API to evade US sanctions, all to align with Chinese consumer demand. Still, it has not been able to satisfy the quantity demanded by China.
The one factor that NIOC has been successful in is reducing Iranian oil’s astronomical discounts which have benefited Iranian people significantly. However, the solution to sell Iranian oil to China is not so much in the hands of Iranians.
Bottom line is, a practical solution here might be asked from the Chinese Ministry of Petroleum to consider forming an organization equal in terms of making decision to the Naftiran Intertrade Oil Company (NICCO) to manage the purchase of Iranian oil in China with the ability to settle with Chinese refineries and Iranian exporters. Through this method, the main disadvantage of Iran’s oil export, which is lack of settlement by LC, can be moderated by two governmental organizations.
It should be considered that in this model, past experiences should be kept and the current settlement model (Telegraphic Transfer) should be used in order not to form a new Kunlun Bank.
