Risking sanctions, China begins drilling in Iran's South Pars field

China began drilling in a massive Iranian gas field earlier this month despite facing major economic and political risks for aligning itself with the Iranian regime.

By commencing this work, and entering into other long-term trade and economic agreements with Iran, the Chinese regime is gambling with its future, observers say, as this leaves it vulnerable to further US sanctions.

In October 2019, the China National Petroleum Corporation (CNPC) backed out of a prior agreement with Iran to drill for oil and gas in the South Pars field in Iran.

CNPC's withdrawal followed the earlier exit of the French company Total, the previous majority shareholder, under pressure of US sanctions on Iran.

At the time, Iranian oil minister Bijan Zanganeh officially announced the news and said Iran's petrochemical company would work on the project on its own.

But while work on phase 11 of the South Pars development was officially stalled, China quietly resumed work, breaking up the project into smaller parts and using so-called "contractors" to hide its hand, OilPrice.com reported.

Iran's deal with China, made after Total's exit from the project, allocated 80.1% of the oil and gas in South Pars to the Chinese. The move drew criticism from the Iranian people and economists, who claimed it overly favoured China.

With an estimated 14.2 trillion cubic metres (tcm) of gas reserves, South Pars accounts for about 40% of Iran's total estimated 33.8 tcm of gas reserves and about 80% of its gas production.

'Selling off Iran'

The regimes of Iran and China this summer quietly drafted a major economic and security partnership deal that would clear the way for billions of dollars of Chinese investments in Iran's energy and other sectors, leaving Iran largely depleted of natural resources.

Critics from across the political spectrum in Iran raised concerns that the government was secretly "selling off" the country in a moment of economic weakness and international isolation.

Many say the 25-year agreement between Iran and China will have a negative impact on the region and beyond.

With this deal, a weakened and cornered Iranian regime -- teetering on the brink of economic collapse, facing major domestic disillusionment from its people, and cut off from most of the world because of its pursuit of nuclear weapons and its arming of militias across the Middle East and South Asia -- will be at the mercy of an emboldened and assertive Chinese regime.

One of Beijing's main strategies for coercion is debt.

It offers massive loans to and gets into burdensome contracts with vulnerable countries around the world ostensibly to help build their economy, but when these countries inevitably cannot pay the loan back, or become unable to fulfill contract obligations, Beijing demands painful concessions.

Those have included either diplomatic support for Chinese interests or wholesale appropriation of a country's natural resources.

A large section of the Iranian public is against Chinese presence on Iran's economic scene, said Iran-based economist Fariborz Etemad.

Even if the regime were to earn money from such a deal with China, the funds would not likely reach the Iranian people, but would rather, as has been proven many times before, line the pockets of corrupt politicians and fund the malign regional activities of the Islamic Revolutionary Guard Corps (IRGC).

"The inability of the Islamic Republic's leaders to secure the needs of the Iranian public is so profound that China's presence cannot compensate for it," Etemad said.

Undercutting arms embargo on Iran

Chinese-Iranian deal-making could extend to arms sales to Iran, though any such sales by China risk incurring sanctions from the United States. Washington has vowed to penalise any government rushing to export weapons to Iran after a decade-old United Nations arms embargo expired in October.

Tehran's greatest interest lies in Russian tanks, jets and air defence systems, Defense News reported in November. That said, some opportunities do exist for Beijing.

"Iran's interest in procuring loitering munitions (otherwise known as kamikaze drones), UAVs [unmanned aerial vehicles] and armed unmanned boats means China will likely supply modern technologies to help the Middle Eastern country develop unmanned naval vessels and aerial drones," Defense News reported, quoting Bahrani analyst Abdullah al-Junaid.

As the embargo expired in October, Beijing professed its intentions of "handling arms trade in a prudent manner", at a Foreign Ministry news conference.

A prominent US-based Iranian journalist who asked that his name be withheld said Iranian officials "mistakenly believe" the 25-year pact with China will help balance US pressure on Tehran, providing it with capital injection and technology.

"It is a fantasy," he said. "In fact, when it came to [international] sanctions against Iran a decade ago, China did not hesitate to vote with the US to impose them on Iran."

The IRGC is a big supporter of the deal with China, he said, because it hopes to buy missiles from that country, so it can reverse engineer them and improve its own weaponry.

'A political misstep'

Iran's decision to deal with China is a political misstep that carries a heavy economic toll and could hinder its relationship with the international community, but it is also a mistake on China's part.

The United States sanctioned two units of China's largest transportation network, China Ocean Shipping Co. (COSCO), in September 2019, stating that they had been complicit in circumventing sanctions on Iran.

The embargo on COSCO immediately caused an increase in the price of oil shipments in Asia and increased overall costs by about 30%.

The fallout reached the point where Chinese government officials demanded the removal of sanctions on the company during trade negotiations with the United States in January. The United States eventually lifted sanctions on one of the two units.

China exports hundreds of billions of dollars worth of goods and services to the US each year, said Moloud Zahedi, an Iranian economist. If the US imposes sanctions on Chinese companies or citizens over their Iran-related activities, China will lose significant segments of its global markets, which are estimated to yield several times the potential profit of investment in Iran.

By commencing drilling in the South Pars field, not only does China risk facing US sanctions once again, but it endangers its standing in the global community.

This will be a critical consideration for China, as the world begins to recover from the coronavirus (COVID-19) pandemic, which has devastated global economies since the virus was first identified in Wuhan, China in December 2019.