A new Beijing-Tehran axis?

A new Beijing-Tehran axis?

James Crabtree
China looks with interest to the return, on the global oil markets, of Iran, free from international sanctions and ready to supply crude oil to the Beijing economy. An approach – that between the two countries – which is cause for concern in India, Tehran's historic trading partner

Chinese President Xi Jinping’s visit to meet Iranian Supreme Leader Ayatollah Ali Khamenei last month sent ripples around the Middle East, alarming Saudi Arabia in particular. But the arrival of Xi also underlined a new sense of competition with India too, namely over which of Asia's energy-hungry emerging giants will win friends in Tehran more quickly, and thus capitalise on the global reopening of its energy sector. Iran announced its return to global oil markets in January, upping production by 500,000 barrels a day. Its oil tankers, which have been waiting patiently off the country's coastline for years, have begun to deliver shipments. The International Energy agency says more is to come; projecting that Iranian output will hit 3.6 million barrels a day over the next few months. Worries about a glut of Iranian crude briefly pushed oil prices below $28 for the first time in more than a decade.

On the hunt for Teheran's oil

Xi’s visit came at a time when China's domestic economy is slowing, contributing a further factor to the recent weakening of global prices with worries that its own domestic energy demand is faltering. But in the medium-term China still needs to secure more energy supplies, explaining part of the reason Xi chose to visit at the very moment of Iran's formal re-emergence into the world economy. At first blush, India would appear to be Tehran’s more natural partner. It is geographically closer, while many of its major companies have longstanding ties with Iran too. Some, such as the Hinduja group, run by the billionaire Hinduja brothers, even used to be headquartered in the country. Perhaps more importantly, many of India's largest refinery companies did plenty of business with Iran until the US sanctions regime was introduced. India has also been moving steadily to reestablish diplomatic ties with Iran. The 2 countries held the latest round of talks between their foreign ministers in early February, including discussions over possible Indian investments to develop Iran’s upstream oil and gas capabilities - including the Farzad-B gas field, discovered by state-backed Indian explorer ONGC in 2008. Yet many Indian security analysts say their government's moves to re-engage with Iran are proving to be too tentative, while arguing that the country was too ready to cut existing ties when the US-led sanctions regime was first introduced.

China as a new regional mediator

Speaking at a recent conference in Goa hosted by the London School of Economics, author and analyst Siddharth Varadarajan argued that both Prime Minister Narendra Modi's government and its predecessor had missed a trick. “India is paying a price for being a late mover,” he said. “India used to take on board the American's concern and slow down its relations with Tehran... If it had been smarter it would have been in an even more advantageous position.” China, by contrast, is in a stronger position. Its market for oil is easily the world's largest, and will continue to grow more quickly than India's, making it an attractive export destination for Iranian producers. China also has the advantage of its greater investment muscle, with the country's state-backed energy groups ready to help develop Iran's domestic energy reserves, where analysts suggest the country needs in the region of $100 billion, in exchange for cut-price oil deals.

China has final advantage too, namely its increasing willingness to play a more overt role as a regional powerbroker, potentially even as a long-term ally for a resurgent Iran. Until recently, China has been careful to avoid being drawn into the complex geopolitics of the Middle East. But lately Xi has seemed more forthright, with his visit in January only the latest example. Put another way, if you want to see the true winner in Asia from Iran's energy emergence, it is hard to look beyond Beijing.