Asian Woes at Iran's Oil Pumps

Michael Richardson (Visiting Senior Research Fellow at the Institute of Southeast Asian Studies in Singapore)

As the US shapes up to confront Iran in the Middle East, it istrying to rally support in Asia for tougher sanctions against Tehran. Washington alleges that Iran has a covert programme to develop nuclear weapons, and that it backs anti-American violence in Iraq.

Iran shows no sign of being ready to comply with a UN Security Council deadline - the end of this month - to suspend its sensitive nuclear work. Instead, Iranian officials have said that they will expand uranium enrichment activity.

Although China and Russia voted for the Security Council resolution in December, they are wary of imposing tougher sanctions, arguing that it would provoke Iran and make a negotiated settlement less likely.

The US is forging closer co-operation with Sunni Arab-led states, especially Saudi Arabia, as a counterweight to Iran's Shiite theocracy. The rising tension in the Gulf troubles many Asian countries. Trade and investment between the two regions is booming. Trade between the Middle East and China alone could rise at least sixfold to US$500 billion by 2020, according to the McKinsey consulting firm.

The bedrock of Asia's interest in the Gulf is energy. It draws about three-quarters of its oil imports from the Middle East. Iran provides close to 15 per cent of Japan's oil and is its third-largest supplier after Saudi Arabia and the United Arab Emirates.

Despite this dependence, Japan - under pressure from its US ally - last year backed away from a deal to invest US$2 billion in Iran's Azadegan oil field. Other Asian countries planning to invest in Iranian energy projects are also feeling the heat from Washington, which has a law to penalise any foreign firm that invests more than US$40 million in oil or natural gas ventures in Iran.

An influential member of the US Congress last week called for negotiations on a US-Malaysia free-trade agreement to be suspended unless Kuala Lumpur bars a Malaysian company from investing US$16 billion to develop gas fields in southern Iran. Malaysia is expected to repeat its refusal to veto the deal when the latest talks end today.

India's foreign minister visited Tehran this week for talks on a plan to spend as much as US$7.5 billion on a 2,570km pipeline to carry Iranian gas through Pakistan to energy-short India. US requests to New Delhi to steer clear of Iran while it continues to defy the UN have played a part in delaying any deal.

China faces some particularly painful choices if tensions continue to increase between the US and its Saudi-led Gulf allies, on the one hand, and Iran on the other. Iran was China's third-largest oil supplier last year, and Chinese state-owned companies have committed to huge investments in oil and gas projects there. Will Beijing risk its relations with the US and its international prestige as a responsible power by putting those energy interests ahead of its professed concern to prevent the spread of nuclear weapons?

And the question may become even more complicated for Beijing. Iranian and Saudi exports account for almost two-thirds of China's Middle East oil imports. If relations between Iran and Saudi Arabia fray in a Gulf power struggle, Beijing may find that it has to choose between two petroleum giants - each of them vital to China's energy security.

(Originally appeared in the February 9, 2007 issue of South China Morning Post in Hong Kong, reproduced here with permission.)