U.S. Enlists Oil to Sway Beijing's Stance on Tehran

BUSINESS

OCTOBER 19, 2009

U.S. Enlists Oil to Sway Beijing's Stance on Tehran

By JAY SOLOMON

WASHINGTON -- The Obama administration is encouraging key Arab states to boost oil exports to China in order to reduce Beijing's reliance on Iranian energy and pare Chinese resistance to tougher sanctions over Tehran's nuclear program.

The administration's strategy has yielded a gain: in a step coordinated with Washington, the United Arab Emirates recently agreed to boost oil exports to China to between 150,000 to 200,000 barrels a day from a current level of 50,000 over the next six months, according to U.S. and Emirati officials.

A senior Emirati official said Abu Dhabi plans to make a significant additional increase "within the next three years."

Saudi Arabia, long at odds with Tehran, also appears prepared to offer China more oil to make up for any losses it incurs as part of an international effort to punish Iran, according to people familiar with Saudi thinking.

The kingdom buys considerable weapons, natural resources and consumer products from China, and is weighing how to leverage those purchases to persuade Beijing to distance itself from Tehran.

The U.S. strategy is as much about realigning diplomatic alliances as shifting the oil supply, U.S. officials said.

Many diplomats and Middle East analysts are skeptical that the U.S. and the Arab states will succeed over the long term in breaking Beijing's reliance on Iranian energy.

Saudi Arabia and the U.A.E. are both constrained in exporting oil by quotas established by the Organization of Petroleum Exporting Countries. Industry analysts question how the two countries could significantly boost exports to China without flouting those quotas and flooding markets with excess oil.

Washington and its European allies increasingly view China as the pivotal player in an international effort to pressure Tehran economically over its nuclear program. Iranian officials are scheduled to meet representatives from the U.S., France and Russia in Vienna on Monday in a bid to conclude an agreement for the international community to better monitor and manage Tehran's stockpile of low-enriched uranium.

Growing sanctions against Iran could lead to significant instability in the Persian Gulf. Saudi Arabia and the U.A.E. could be important partners in guaranteeing Beijing's continued oil supply. China's consumption is expected to grow to about 20 million barrels of oil a day by 2030 from its current level of eight millions barrels a day.

Saudi Arabia is the largest oil exporter to China, sending 740,000 barrels a day during the first five months of 2009. Iran is the second-largest supplier at about 540,000 barrels a day.

"We've been telling the Arab states to directly express their concerns to Russia and China about Iran's actions," said a U.S. official involved in the dialogue. "And we stressed that they should use their leverage."

Beijing is the second-largest buyer of Iranian oil. The Asian giant has pledged tens of billions of dollars in new investment in Iran's oil and gas infrastructure in coming years. Chinese Premier Wen Jiabao damped U.S. hopes for broad cooperation on Iran last week, praising Beijing's "widened and deepened" relationship with Tehran following a meeting with Iranian Vice President Reza Rahimi.

China and Russia have the ability to block new sanctions proposals being discussed at the United Nations Security Council. Beijing has repeatedly expressed opposition to enacting expansive financial penalties against Tehran.

China's Ministry of Foreign Affairs and Beijing's National Energy Administration didn't respond to requests for comment about the U.A.E. offer of additional oil.

A spokesman at Saudi Arabia's Washington office didn't respond to requests for comment.

Beijing also views Iran as a crucial partner in helping China achieve energy independence. China is investing in massive joint exploration, extraction and refining projects in Iran. Oil-industry analysts note that many of China's energy ventures in Iran have yet to bear fruit, due to technological deficiencies and contract disputes. But Beijing is still seen as unwilling to turn its back on opportunities to develop China's own refining and extraction capabilities.

"The Chinese are wooing Iran because they are banking that the best energy security is to be their own producers," said Patrick Clawson, an Iran expert at the Washington Institute for Near East Policy.

U.S. officials, however, view the U.A.E.'s action as an important early signal from a key oil-producing Arab state.

—Sue Feng contributed to this article.

Write to Jay Solomon at jay.solomon@wsj.com