After each episode of escalation between Tel Aviv and Tehran in recent months, the head of Chinese diplomacy Wang Yi spoke by telephone with his Iranian counterpart. A sort of ritual, to recall the strength of the ties between the two countries and reaffirm mutual support. Their last call, on October 14, took place in a particular context: a few days earlier, the flaring up of the conflict had fueled discussions on possible strikes against Iranian oil installations.
Iranian black gold – against which the United States reintroduced sanctions in 2018 – is at the heart of cooperation between the two countries, with Beijing today absorbing almost all of the exported volumes. China is careful not to communicate the figures, but Iran represents between 10 and 15% of its oil imports, according to data from freight analysis companies Vortexa and Kpler. These flows have increased since the restrictions were put in place. For good reason, Tehran offers cheap prices, hoping to attract the few countries that dare to defy the rules imposed by Washington. A boon for Beijing, which is looking for low prices to satisfy its immense energy needs.
This trade was not always carried out with impunity. This is evidenced by the sanction of the Chinese company Zhuhai Zhenrong in 2019, for having imported Iranian oil. Or the seizure by the United States of nearly a million Iranian barrels transported by the Suez Rajan ship in 2023. To continue their trade, China and Iran had to be inventive and take precautions.
Teapots and ghost armada
Chinese purchases go through small private refineries – nicknamed “teapots” because of their small capacity – which operate more discreetly than state companies, such as the giant Sinopec. “These small companies do not have activities in dollars and are therefore difficult to sanction,” explains Homayoun Falakshahi, analyst at Kpler. Concentrated in the province of Shandong, in the east of the country, their market share amounts to around 15% of all refineries according to Vortexa, and around 25% according to the Wood Mackenzie firm.
Transporting the goods can be tricky, as oil ostensibly flying the Iranian flag would immediately attract Washington’s attention. Thus, more than a hundred ships form a “dark fleet”, involved in the hidden sale of oil. “Part of this fleet is operated by Iran, but the majority are old ships, more than 15 years old, which were due to be scrapped. They are bought by front companies based in Hong Kong or Dubai, who use them to transport oil under sanctions,” explains Homayoun Falakshahi.
Participants in this obscure market have no shortage of tactics to slip through the cracks of the US: “Most ships involved in transporting Iranian oil manipulate their position or deactivate their automatic identification signal. The same cargo can be transferred on three or four ships before reaching its final destination”, summarizes Michelle Wiese Bockmann, analyst at Lloyd’s List Intelligence. And some of that oil is relabeled along the way as coming from other countries, such as Malaysia or Iraq, she says.
Price difficulties
This sophisticated strategy could be jeopardized by potential strikes on Iranian infrastructure, particularly if export terminals – such as Kharg Island – were hit. Refineries or oil fields could also be prime targets for a possible attack. In the scenario of a destruction of export capacities, oil flows to Shandong province would be interrupted, but China could still survive. “It would not be in difficulty in terms of volumes, but rather in terms of prices, because it would have to turn to other suppliers who would not give it gifts,” estimates Francis Perrin, research director at the Institute of international and strategic relations and specialist in energy issues.
Beijing would then have to pay market prices for its oil. And the latter could increase by 10 or 15 dollars in reaction to strikes on its oil installations, according to Homayoun Falakshahi of Kpler, who envisages a barrel at more than 90 dollars in this case. “Iranian exports today represent 2 to 3% of world volumes. But a small variation in supply could lead to major price changes,” warns Jean-Pierre Favennec, specialist in energy issues and professor at Paris Dauphine.
To replace the lost volumes, China could buy more oil from Saudi Arabia, Iraq or the United Arab Emirates. Russia, also under sanctions, could hardly replace Iran, notes Francis Perrin. “Even in the worst scenario, there will be no shortage of oil in China because the global supply is now abundant. Saudi Arabia, alone, has enough to compensate for the disappearance of Iran on the global market”, concludes the academic.
The Saudi choice would, however, be risky, as Iran could believe that Riyadh is stealing market share from it and threatening its energy infrastructure. “In theory, Saudi Arabia could increase its production to export more to China. However, this is politically delicate because the country is afraid of reprisals from Iran,” points out Homayoun Falakshahi. Jean-Pierre Favennec adds: “If the source from the Gulf countries dries up because of Iranian retaliation, it would be difficult for China to replace these volumes because the other countries do not have excess capacity.”
Small independent Chinese refineries would be the first to suffer from a drop in flows. Because only 30% of Iranian oil volumes currently imported into China are replaceable, according to Vortexa. “The vast majority of Iranian imports are made by these tea refineries, which cannot afford to buy more expensive oil elsewhere, and will surely have to reduce their production if Iranian flows stop,” notes Emma Li, analyst oil markets at Vortexa.
For his part, Tomer Fadlon qualifies the risk. This researcher at the Institute for National Security Studies recalls that China has accumulated significant oil reserves. The latter would be enough to last around ninety days without any imports by sea, according to Emma Li. Especially since OPEC recently revised downwards its forecasts for Chinese oil demand for this year.
Disaster scenario
For the moment, the avenue of strikes on energy infrastructure is far from being the only one on the table. According to information from Washington PostIsraeli President Benjamin Netanyahu would have argued with the American Joe Biden that he wanted to target military installations as a priority. The Democratic administration, which wants to keep oil prices low in the run-up to the presidential election in November, has every interest in Israel avoiding strikes on oil sites. “The recent drop in oil prices shows that the markets do not think that the hypothesis of Israeli strikes on the Iranian oil sector is likely,” points out Francis Perrin.
Traders nevertheless remain cautious because a risk of escalation remains. In response to a possible attack on its oil installations, Tehran regularly threatens to block the Strait of Hormuz – an essential corridor for global crude trade. In this catastrophic scenario, China would see a major obstacle arise for its imports by sea and would suffer an even greater increase in prices. A possibility which remains unlikely at present, agree the specialists interviewed by L’Express. But beyond blocking the Strait of Hormuz, “Iran could also threaten ships loading oil in the Gulf, in Saudi Arabia or Kuwait for example. This could happen even if Israel struck other sites in Iran than oil installations”, considers Jean-Pierre Favennec.
China therefore remains waiting. Pending the response, Chinese Foreign Minister Wang Yi, acting as moderator of the conflict, asked all parties to “act with caution”. There is clearly interest.
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