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China Consolidates Grip On Key Oil Transit Routes

Following the recent slew of major cooperation agreements (including in energy, security, and logistics) between various permutations of Iran, Iraq, Russia, and China, another set of agreements - this time between Iran and Oman - allows Beijing to further consolidate its grip over the principal oil transit routes from the Middle East. It also allows it the opportunity to develop another major source of liquefied natural gas (LNG) supplies, to the detriment of the U.S.'s key allies in Europe.

Four deals were signed within the last week or so, focused on the economic, investment, free trade, and energy sectors. Most notable of the energy sector deals made public was for the joint study of the Hengam oil and gas field. This is the first publicised agreement on cooperation between Iran and a neighbouring country in a shared field, although, as analysed in depth in my new book on the new global oil market order, Iran and Iraq have been closely cooperating on their many shared fields for decades. The Hengam field lies around 70 kilometres off the southern Iranian coast, to the north of Oman, at the juncture of the Persian Gulf and the Gulf of Oman that sits almost exactly in the centre of the Strait of Hormuz. This point is the key global transit route for around 30-40 percent of all the world's oil at any given moment.

This is one of the two key reasons why this deal is so important to China, Iran, and to the global oil markets - far more than the estimated 700 million barrels of oil and two trillion cubic feet of gas that the Hengam field contains. One of China's core strategic aims as exercised in practice through its 'One Belt, One Road' multi-generational power-grab project is to control all of the transport routes for the world's oil and LNG supplies that come out of the Middle East, as also analysed in depth in my new book on the new global oil market order. China already had much control over the  Strait of Hormuz through its all-encompassing 25-year deal with Iran, first reported exclusively by me back in September 2019. The same deal also gives China a hold over the Bab al-Mandab Strait, through which crude oil is shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This has been achieved as it lies between Yemen - formerly heavily controlled by Iran-backed Houthis, but also now subject to the new China-brokered relationship deal between Iran and Saudi Arabia - and Djibouti, over which China has also established a stranglehold. What the recent seizure by Iran of the Advantage Sweet oil tanker also showed is that the Gulf of Oman can no longer be regarded as a safe alternative transport route for oil tankers either. This new deal for the Hengam oil and gas field will further cement China's grip over all Middle Eastern oil and LNG transit routes.

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It is important to reiterate at this point that all the Middle East's oil and gas exports are at a once-in-a-lifetime tipping point as to where they would be sent in the event of a major crisis between the U.S. and its allies, and China and its allies, such as occurred on a more limited scale after Russia's invasion of Ukraine in February 2022. This crucial part of the new global oil market order, as analysed in my new book on that very subject, saw the U.S. make great efforts to secure for its allies in Europe crucial new energy supplies from the Middle East and North Africa to make up for previous Russian supplies lost due to sanctions. It also saw China, a net energy importer itself, do the same. This re-ordering of the alliances of the major Middle Eastern oil and gas producers is still ongoing, but China had great success in broadening and deepening its relationships with several key Middle Eastern countries from 2018 to 2022. This period saw the U.S. step back from its previous role of being the 'global policeman', as the Truman Doctrine implied. 

Specifically, as also analysed in my new book, after the unilateral withdrawal of the U.S. from the 'nuclear deal' with Iran in May 2018 and the subsequent withdrawals from Afghanistan, Syria, and Iraq, China had been so successful in stepping into the power vacuum created that it was able to broker the 'impossible deal' - the resumption of relations between the historical enemies of Iran and Saudi Arabia. China's interim progress in this regard can also be seen from a series of meetings in Beijing at the end of December 2021/beginning of January 2022 between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, plus the secretary-general of the Gulf Cooperation Council (GCC). At these meetings, the principal topics of conversation were to finally seal a China-GCC FTA and to forge "a deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat." Additionally, Saudi Arabia's very public announcement in April this year that its cabinet had approved a plan to join the Shanghai Cooperation Organisation (SCO) as a 'dialogue partner' is the surest sign yet that any U.S. efforts to keep it out of the China-Russia sphere of influence may now be futile.

With the Iran-Oman relationship now even tighter - a move long opposed by the U.S. - China can move ahead with plans to build out Iran's LNG capabilities, which will marry Iran's vast gas resources with Oman's underused LNG production facilities. This is again much more important than just finally giving Iran an LNG industry, for two key reasons. First, LNG is the new emergency energy staple of the U.S.'s key allies in Europe, as was evidenced in the desperate scramble to secure such supplies for Germany in the immediate aftermath of Russia's invasion of Ukraine in 2022. If these new LNG deals had not been secured by the U.S. for Germany at that time then there was little doubt that the European Union (E.U.) would have done nothing significant to punish Russia for the invasion. Indeed, it was the E.U.'s fear of losing cheap plentiful supplies of Russian gas and oil that was the primary reason why it allowed Russia to annex all of Ukraine's Crimea region back in 2014 with no real consequences, as also analysed in depth in my new book on the new global oil market order. 

The second key reason why this creation by China of a major Iranian LNG capability is so important is that it will give China more leverage to keep the world's biggest exporter of LNG - Qatar - firmly on its side when the crunch point comes between the U.S. and China. This leverage will accrue from the fact that Iranian LNG will come not just from the giant North Pars gas field but also from the supergiant South Pars gas field, which is one part of the two parts of the world's largest gas reservoir that it shares with neighbouring Qatar (in the form of the 'North Dome', or 'North Field'). The North Dome is by far Qatar's chief source of income, and the manner of Iranian gas production from the South Pars field has a direct consequence on the output and longevity of gas from Qatar's side of the shared reservoir. Additionally confirming its hold over Qatar, both before and during the Russian invasion of Ukraine, China made a series of long-term deals with Qatar for massive supplies of LNG. 

It is little wonder then that Iran's President Ebrahim Raisi announced in the last week or so that Iran-Oman relations have been promoted from 'commercial' stage to 'investment' phase. The Iranian president added that the sectors of energy, industry, trade, communications, defence and security affairs, road and rail lines, maritime transport and transit, and financial and monetary exchanges - all key areas of China's own 25-year deal with Iran, and crucial parts of its 'One Belt, One Road' program - are all areas in which the two countries will expand their cooperation.

By Simon Watkins for Oilprice.com

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Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More