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Simon Watkins

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China Consolidates Grip On Key Oil Transit Routes

  • China already had much control over the  Strait of Hormuz through its all-encompassing 25-year deal with Iran.
  • Through a deal between Iran and Oman, China increases its influence over key transit routes for oil in the Gulf of Oman.
  • The re-ordering of the alliances of the major Middle Eastern oil and gas producers is still ongoing.
Strait of Hormuz

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.

Related: Shell Halts Unit At Europe’s Biggest Refinery Due To Leak

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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  • Mamdouh Salameh on June 07 2023 said:
    In recent times and particularly since the start of the Ukraine conflict, China’s energy security has been enhanced globally immeasurably. China’s energy security is now secure whether via the Strait of Hormuz or the Malacca Strait. The reasons for this security are:

    1- The China-Russia strategic alliance virtually dominates the oil resources of the Gulf region with its influence on the ascendency while the United States’ is ebbing fast.

    2- China now has now much more control over the Strait of Hormuz through its agreements with Iran and Oman and access to the bulk of Gulf Cooperation Council (GCC) countries’ oil and gas exports. This control would be further enhanced once China and the GCC sign a free trade agreement.

    3- China has monitoring and defensive stations at the Pakistani port of Gwadar located on the southwestern Arabian Sea enabling it to monitor its oil shipments from the Gulf and also protecting them.

    4- China is now receiving sizeable and secure volume of Russian crude oil via oil pipelines traversing the two countries and also by sea via the Northern Sea Route (NSR) from the Russian Arctic.

    5- China can virtually bypass the Strait of Malacca which is guarded in the northern end by the Indian Navy and in the southern end by the US Navy and through which 80% of its oil shipments from the Gulf has to pass daily. A few years ago China built an oil pipeline via Myanmar that bypasses the Strait altogether. Moreover, it is unlikely that in a future conflict between China and the United States, the Indian Navy will side with the US and block the northern end of the Strait. India has more economic, strategic and geopolitical interests with China the world’s biggest economy and the ultimate superpower than with with the United States.

    6- China has virtual control over the Bab El Mandib Strait via its presence in Djibouti and by having friends among the Houthis, Iran’s allies in Yemen.

    Last but not least what the author describes as a multi-generational power-grab project, China’s Belt & Road Initiative (BRI) is part and parcel of the new emerging World Order being ushered in by the strategic Chinese-Russian alliance. It has seismic geopolitical, strategic and economic impact on the global trade system and the race for the top of the pyramid in global influence, something the United States is already losing decisively.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment

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