With the world's attention focused on Iran's continued development of nuclear weapons and support for the insurgency in Iraq, what has gone largely unnoticed is that the country is also in the midst of an extreme economic transformation. After years of economic isolation, Iran has once again become a magnet for foreign investment, specifically, in the lucrative oil and liquefied natural gas (LNG) sectors. And no country has taken advantage of these renewed economic opportunities more than China. 

China and Iran have been cultivating an increasingly close relationship in recent months, one borne from China's need for energy to run its growing economy and Iran's need for consumer goods to satisfy its young, West-leaning population. Ali Akbar Salehi, Iran's former representative to the International Atomic Energy Agency (IAEA) recently confirmed this, saying, "We [Iran and China] complement each other. The Chinese have the industry and the Iranians have the energy resources."

The budding relationship that is developing between these two brutal regimes has received a great amount of international attention as of late, particularly in the wake of their signing of mega oil and LNG energy deals in October. Tellingly, Iran has already stated that it would prefer to have China replace Japan as the number one importer of Iranian oil. Fifty-one percent of China's crude oil imports already come from the Middle East, and that figure is projected to jump to 70 percent by 2015.

Viewing China's increasing dependence on Middle East natural resources as a national security issue, the Bush Administration has attempted to prevent further energy deals between China and Iran, but to no avail. Indeed, one official from Sinopec, China's second largest oil company, said last January that, "Sinopec is paying no attention to the U.S. request and will do its utmost to carry on its bidding for an exploitation project in an Iranian oilfield." 

In late October, a contract was signed by Sinopec and Iran for an estimated $70 billion to $100 billion for the shipment of LNG to China. As part of the deal, Sinopec also agreed to purchase 250 million tons of LNG over thirty years and to develop the Yadavaran oil field in southwest Iran.

Other energy deals are in the pipeline. A $50 billion to $100 billion LNG deal is currently being negotiated between China and Iran and could be signed very soon, and a preliminary accord was recently signed by the two countries calling for China to purchase 10 million tons of LNG a year. Moreover, China's state oil trader, Zhuhai Zhenrong Corp., has agreed to buy over 110 million tons of LNG from Iran over a twenty-five year period for $20 billion. Iranian Petroleum Minister Bizhan Namdar Zanganeh, speaking on the abundance of economic activity between the two countries, noted, "Iran is a natural partner to fuel China's economy. We [Iran] have invited Chinese companies to actively participate in our exploration and development projects by promising them the greatest incentives."

The energy relationship between China and Iran has flourished, while Chinese negotiations with Russia, the world's largest LNG reserve holder, have soured. As energy shortages take hold, China has been increasingly frustrated by its fruitless energy partnership with Russia in the construction of an $18 billion, 3,045-mile pipeline from Siberia to China. The proposed oil pipeline would not only address China's need for energy, but also provide a land-based alternative to seaports susceptible to an American naval blockade. "This [failed oil and natural gas negotiations] shows that China cannot have high hopes for Russia to solve its energy needs" said He Jun, an analyst for the China-based consulting firm, Anbound, in October.

For Iran, exploration contracts for new oil fields; the optimization of existing oil and gas fields through increased production efficiencies; the development of new transportation conduits; and increased investment in the refining and petrochemical industries, have all become important parts of a well-conceived strategic economic plan.

Tehran plans to invest $50 billion in its energy sector over the next several years. This level of investment is essential for economic growth, since oil proceeds account for 40 to 50 percent of government revenues. According to the Oil and Gas Journal, Iran is the world's second largest oil producer, with its 32 oil fields containing approximately 125.8 bb of proven oil reserves, or 10% of the world's total. Only with sufficient foreign investment will Iran meet self-imposed quotas of approximately 5 million bpd by 2024.

After years of revolution, isolation and war, Iran continues to try to remake its image to attract Western corporate investment. This has been a difficult task, due to continued U.S. economic sanctions first put in place as a result of the Iranian hostage crisis of 1980. The primary obstacle to American investment in Iran has been the Iran-Libya Sanctions Act (ILSA) of 1996, which imposed sanctions on persons making certain investments designed to enhance the ability of Iran or Libya to develop their petroleum resources. In March 2003, President Bush extended the economic sanctions imposed against Iran due to the country's support of international terrorism and attempts to acquire WMDs. The Iranian response to the continued U.S. economic sanctions has been dismissive. "Sanctions are not useful nowadays, because we have many options in secondary markets, like China." Hossein Shariatmadari, a leading Iranian conservative theorist, told Chinese business newspaper "The Standard" in November.

Well-intentioned as they are in both principle and practice, economic sanctions, coupled with geopolitical developments, have inadvertently provided the Chinese and their state-sponsored energy conglomerates with a unique economic opportunity. U.S. actions to halt further oil and LNG contracts have been effectively circumvented by China and Iran. Iran, seeking to foster additional energy partnerships, has indicated its desire to join the Shanghai Cooperation Organization (SCO), created in 1996 to promote the mutual interests of its member countries. Originally dubbed the "Shanghai Five," the group now includes China, Russia, Tajikistan, Kazakhstan, Kyrgyzstan and Uzbekistan. Iran's acceptance into the group would create an even more diverse and powerful alliance.

Unfortunately for the United States, a large part of the foreign investment in Iran's energy infrastructure has come from the European Union and Southeast Asia. Signaling a possible fissure in U.S. efforts to further unite the world community against Iran's Islamic regime, while at the same time dissuading energy development, France, Italy, Germany, Canada, Britain and Japan have all signed development and exploration contracts with Iran. A $2 billion agreement signed between Japan's INPEX and Iran to develop the Azadegan field is especially troubling, given the July 2004 release of a discussion paper prepared for Japan's Defense Agency warning that Japan's competition with China for oil could spark a Chinese attack on mainland Japan.

Closer energy ties between China and Iran will reduce America's leverage to negotiate economic, military and nuclear nonproliferation issues. At its core, the new alliance is a mutually beneficial arrangement based upon the satisfaction of each country's needs. But perhaps more importantly, the alliance presents a united front in the face of what is perceived as a common threat posed by the U.S. Taken separately, China and Iran are formidable regional powers. However, when taken together, they become an unstoppable and influential force on many levels.

Indeed, recent diplomatic statements made by China to the United Nations and IAEA in defense of Iran's nuclear program show that China may be replacing Russia as a chief Iranian strategic ally. Iran has a history of active negotiations with China to secure nuclear technology, including the development of a 300-330 megawatt reactor and the sale of hundreds of tons of anhydrous hydrogen fluoride (AHF), a chemical used to enrich uranium. 

Furthermore, the November 30 announcement by Iranian news agency Irna that Iran and China have signed a "memorandum of understanding" designed to increase cooperation in the areas of aerospace and satellite technology only complicates an already delicate situation, given that this shared technology could be used in the development of Iran's long-range missile program.

In addition, China has replaced Russia as Iran's leading conventional arms supplier, providing Tehran in recent years with artillery pieces, tanks, Seersucker surface missiles, anti-ship missiles, Hudong fast attack craft, F-7 combat aircraft and rocket-propelled mines. These purchases have upgraded Iran's aging weapons systems and replaced equipment lost as a result of the Iran-Iraq War.

Perhaps all of these agreements are designed merely to marginalize the U.S. and improve the negotiating position of both China and Iran -- no one knows for sure. But one thing is certain: an increasing China-Iran alliance is enough to cause Bush administration officials many sleepless nights in the months and years to come.

 

Frederick Stakelbeck, Jr. is a freelance writer based in Philadelphia

Updated 1/4/05