Chinese Multilateralism in Energy Security the Case of Iran

University of Amsterdam Graduate School of Social Sciences

Chinese Multilateralism in Energy Security The Case of Iran

MSc Political Science (International Relations) Thesis Project: The Geopolitical Economy of Energy

23 June 2017 Amsterdam, the Netherlands

Author: Supervisor: Thijs Jansen Dr. M.P. (Mehdi) Amineh 11094966 Second reader: Dr. H. (Henk) Houweling.

Table of Contents

Abstract ...... 5 Acknowledgements ...... 6 Map 1 – China...... 7 Map 2 – Iran ...... 8 List of Tables and Figures ...... 9 List of abbreviations ...... 10

Chapter 1: Research Design ...... 13 1.1 Introduction ...... 13 1.2 Literature Review ...... 16 1.3 Theoretical and conceptual framework ...... 22 1.4 Brief argumentation and hypotheses ...... 25 1.5 Research method ...... 26 1.6 Structure of the thesis ...... 27

Chapter 2: Background ...... 29 2.1 Introduction ...... 29 2.2 Background of Chinese state-energy relations ...... 29 2.3 The current Chinese energy situation ...... 32 2.3.1 Oil ...... 33 2.3.2 Gas ...... 34 2.4 Conclusion ...... 35

Chapter 3: The Sino-Iranian Energy Relations ...... 37 3.1 Introduction ...... 37 3.2 State, energy security and NOC’s in China ...... 37 3.2.1 The Chinese state and energy supply security ...... 38 3.2.2 The going out strategy and Chinese NOC’s ...... 40 3.3 State, the hydrocarbon Industry, and the political economy of energy in Iran ...... 44 3.3.1 The political economy of energy in Iran ...... 44 3.3.2 The Iranian hydrocarbon industry ...... 46 3.4 The Sino-Iranian energy relations ...... 52 3.4.1 Sino-Iranian diplomacy and trade...... 52 3.4.2 The activities of China’s NOC’s in Iran ...... 56

3.5 Conclusion ...... 62

Chapter 4: Geopolitical and geo-economic challenges for the Chinese energy supply security from Iran ...... 65 4.1 Introduction ...... 65 4.2 Domestic challenges in Iran ...... 65 4.2.1 Political (power) challenges ...... 65 4.2.2 Socio-economic challenges ...... 68 4.2.3 Technical challenges ...... 69 4.3 International Challenges ...... 70 4.3.1 The Middle East ...... 71 4.3.2 China, Iran and the West ...... 74 4.4 Conclusion ...... 79

Chapter 5: Conclusions ...... 83

Bibliography ...... 89 Primary sources ...... 89 Internet Sources ...... 89 Academic articles and book chapters ...... 91

Abstract

This thesis will provide a comprehensive analysis of the involvement of China in Iran between 2001 and 2017. This will be done by using a critical geopolitical perspective, which enables to analyze the crucial factors that have contributed to China’s activities beyond its borders. In addition, it is able to explain geopolitical and geo-economic means that gain importance in the international sphere. Analysis is in this thesis relies on several claims. First, the Chinese development of the last decades has depended on increasing energy imports, based on the current Chinese energy situation this will continue in the foreseeable future. China’s national oil companies (NOC’s) have a crucial role in this regard. The companies are important tools for Chinese geo-political economic power projection. To determine the strength and sustainability of energy relations, this thesis will look into diplomatic-, trade-, and investment relations. Furthermore, it outlines the increasing military cooperation on the Eurasian continent. Iran’s domestic ruling elite is analyzed within the critical geopolitical perspective and from an rentier state perspective. The country’s ruling elite is highly dependent on incomes from oil. It will be argued that the elite’s stability in Iran is maintained through high expenses on defense and military. Domestic as well as international geopolitical and geo-economic challenges have the potential to influence the Chinese energy supply security from Iran.

Keywords: China, Iran, multilateralism, energy relations, critical geopolitics

Acknowledgements

This thesis has been the result of six months of extensive research into the Sino-Iranian energy relations. When I started studying I couldn’t have guessed that this would be the subject that I would eventually write my final thesis on. After studying economics and business administration in my Bachelor, I wanted to change the direction of my studies during my Master. This has resulted in two years of studying International Relations at the University of Amsterdam. In the first semester of my Master I followed the course Energy and Geopolitical Economy in Eurasia, taught by Mr. M.P. (Mehdi) Amineh. During the first lectures and while reading articles, the subject started fascinating me more and more. At the end of the course I was determined to write my thesis on the subject and with Mr. Amineh. Luckily, this became reality as I got into his research project. In this thesis I’ve tried to capture the most important factors of relations between China and Iran, when it comes to energy supply security. Although there will always be room for more analysis, I’ve tried to be as comprehensive and inclusive as possible. The framework set out within critical geopolitics possesses important tools to accurately describe, analyze, and understand the specifics of energy relations. The process of working on a project that has the size and requirements of this thesis, obligates you to be a critical student. In fulfilling that process I want to extend my gratitude to several persons that have helped me during these last six months. First, I want to thank Mehdi. His continuous efforts to stay engaged with my research, his passion for the subject, and his extensive knowledge have helped me tremendously in completing this thesis. Furthermore, I would like to thank my parents and sister. Not only for the six months of this thesis, but also for earlier support in completing my studies. Special gratitude goes out to my father Jaap Jansen for his ongoing critical notes, that have enhanced this thesis. Finally, all friends, relatives, roommates, sport-buddies, and all others that have supported me, and missed out on me as I was working on this project the past half year. In this regard, I want to thank Jonas Kolenberg and Louise Kirby Petruccio for their final editing. It makes me feel proud that I’ve bundled my research and findings, on such a complex matter as the Sino-Iranian relations, in this thesis.

Thijs Jansen June 23rd 2017

Map 1 – China

Source: The CIA World Factbook (2017)

Map 2 – Iran

Source: The CIA World Factbook (2017)

List of Tables and Figures

Tables Table 3.1 Overview of China’s three major national oil companies 42 Table 3.2 Iran’s government budget dependent on oil (2000 - 2009) 50 Table 3.3 FDI by Chinese companies in Iran 58 Table 3.4 Iran’s new upstream oil projects 61 Table 4.1 Economic bases of the political factions in Iran 66 Table 4.2 Iran’s historical level of democracy since the Shah 67 Table 4.3 Qualified IOC’s for Iranian upstream energy projects 70 Table 4.4 State Fragility Indexes 74 Table 4.5 Military spending US, SCO members, and Iran 79

Figures Figure 2.1 The reformed Chinese energy sector 31 Figure 2.2 Total primary energy consumption in China per fuel-type (2012) 32 Figure 2.3 China’s oil production and consumption from (1993 – 2016) 34 Figure 2.4 China’s natural gas production and consumption (2000 – 2013) 35 Figure 3.1 Primary energy consumption OECD and China 39 Figure 3.2 China’s major oil suppliers in 2014 40 Figure 3.3 Chinese M&A’s and FDI in energy in the 2000s 43 Figure 3.4 Oil production and consumption in Iran 47 Figure 3.5 Iran’s government budget dependent on oil (1955 – 2008) 48 Figure 3.6 Iran’s governing bodies and connection to the energy sector 49 Figure 3.7 Iran’s GDP dependent on oil (2001 – 2014) 50 Figure 3.8 Iranian exports and the petroleum industry 51 Figure 3.9 Official contacts between Chinese and Iranian high-level officials 54 Figure 3.10 Value of Sino-Iranian trade (2003 – 2015) 55 Figure 3.11 Chinese FDI in Iran (2005 – 2017) 56 Figure 4.1 Parallel multilateral structure promoted by China 78

List of abbreviations

ASCM Anti-Ship Cruise Missiles BP British Petroleum B/d Barrels a day CCP Chinese Communist Party CEO Chief Executive Officer CGIT China Global Investment Tracker CIA Central Intelligence Agency CNOOC Chinese National Overseas Oil Company CNPC Chinese National Petroleum Company COD Central Organizational Department (China) EIA Energy Information Administration EU European Union EOR Enhanced Oil Recovery FDI Foreign Direct Investment FYP Five Year Plan GDP Gross Domestic Product HRS Household Responsibility System (China) IDP Internally Displaced Person IEA International Energy Agency IMF International Monetary Fund IOC International Oil Company IPC Iran Petroleum Contract IPO Initial Public Offering IRGC Islamic Revolutionary Guard Corps IRI Islamic Republic of Iran JCPOA Joint Comprehensive Plan of Action (Nuclear Deal) LNG Liquified Natural Gas Mb/d Million barrels a day

MOU Memorandum of Understanding M&A Mergers and Acquisitions NIOC National Iranian Oil Company NOC National Oil Company NPC National Petrochemical Company (Iran) OBOR One Belt One Road OECD Organization for Economic Co-operation and Development OMV Austrian Mineral Oil Administration (German: Österreichische Mineralölverwaltung) OPEC Organization for the Petroleum Exporting Countries PGNiG Polish Petroleum and Gas Mining (Polish: Polskie Górnictwo Naftowe i Gazownictwo) PLA People’s Liberation Army PRC People’s Republic of China PSA Production Sharing Agreement PTTEP PTT Exploration and Production (Public Company Limited) R&D Research & Development SASAC State Assets Supervision and Administration Commission (China) SCO Shanghai Cooperation Organization SETC State Economic and Trade Commission (China) SFI State-owned Financial Institutions (China) Sinopec China Petroleum & Chemical Corporation (or Sinopec Limited) SIPRI Stockholm International Peace Research Institute SOE State-Owned Enterprise SPC State Planning Commission (China) Tcf Trillion cubic feet TGE TGE Marine Gas Engineering TVE Township and Village Enterprises (China) UAE United Arab Emirates UK United Kingdom UN United Nations

(UN) SC (United Nations) Security Council U.S. United States (of America) USD United States Dollar WTO World Trade Organization

Chapter 1: Research Design

1.1 Introduction The Chinese industrial development since the 1970’s has resulted in remarkable economic growth. Naturally, the economic growth is accompanied by an increasing need to fuel the domestic industry. From the 1990’s onwards, the Chinese government, historically largely influenced by the Communist Party, started to implement policies to secure its energy supply. One of these policies was the increasing involvement with countries cross its borders. Conventional bilateral approaches, such as energy import and economic cooperation, have gradually changed into a multilateral approach. The BRICS, the Asian Investment Infrastructure Bank and several other initiatives with Chinese involvement have gained global attention. In addition, China is increasingly capable of projecting its power outside its borders. The central purpose within this capability is to guarantee its energy supply security. Iran, is one of the most resource-rich countries in the world. With the second largest reserves of natural gas and fourth largest reserves of crude oil it has enormous potential for energy trade. It is for this reason that China, by means of its national oil companies started to develop activities in the country. The downside, however, of doing business with – and in – Iran has for long been its difficult position in the international landscape (e.g.: sanctions, position in the Middle East, etc.). In recent years this has somewhat changed with the agreement on the Nuclear Deal in 2015 and the election – and re-election – of current President Hassan Rouhani.

1.1.1 Objectives The situation stated above has resulted in the formulation of several objectives that are assessed and constitute the central research elements presented in the thesis presented below. - Identify agencies and actors in energy policy-making in China and Iran that have a direct influence on energy relations. - Understand the Chinese strategy regarding its energy supply security. - Explain how the identified agencies and actors influence the Iranian hydrocarbon industry. - Outline Iran’s and China’s relations vis-à-vis the United States. - Outline diplomatic and economic relations between Iran and China in the period from 2001- 2017 by state and national oil companies (NOC’s). - Assess the geopolitical challenges to China’s energy supply security form Iran. - Outline the geopolitical challenges to China’s energy supply security form the Middle East under the condition of maintaining current relations with Iran. - Assess the influence of Western actors (i.e.: the EU, US, international oil companies (IOC’s), and multilateral institutions) on non-state actors that contribute to the Sino-Iranian energy relations (i.e.: NOC’s, multilateral institutions)

1.1.2 Research questions Following from the objectives, the purpose of this thesis has been bundled in the formulation of a central question:

“What are the challenges and opportunities of energy supply from Iran for the Chinese energy security?”

To give an answer to this question, research is divided into sub-questions that all in part explain the challenges and opportunities for the Sino-Iranian energy relations.

1. Which actors are primarily involved in the Sino-Iranian energy relations? 2. What efforts have been made in China and Iran in order to render the energy relations between both countries? 3. What are the geopolitical and geo-economic challenges for the Sino-Iranian energy relations? 4. How have recent events, such as the Joint Comprehensive Plan Of Action (JCPOA), the introduction of the Iran Petroleum Contract (IPC), and the (re-)election of Rouhani affected the Sino-Iranian energy relations?

1.1.3 Social and scientific relevance Energy supply security has become an essential part of countries strategic objectives in international relations (Remme, Blesl & Fahl, 2008; Amineh & Guang, 2014). The European Commission issued the Green Paper in 2006 in which energy transition and diversification of energy sources were central concerns. The US, for its part, is currently extracting large quantities of shale gas, primarily to guarantee its own energy supply security (Stevens, 2012). Emerging economies (i.e.; China, India, Brazil) have become new competitors on the energy market. China’s rapid economic growth changed the country in 1993 from an exporter of energy to a net importer. Today it’s the world’s largest energy-consuming state (EIA, 2015). Growing energy demands put pressure on oil-exporting regions. The Middle East, with its vast natural reserves, is one of the key regions in meeting the worlds current energy needs. Iran has a key position, both geographically as strategically. Ranking second in gas reserves and fourth in oil reserves it is a recognized and reliable – at least, in terms of reserves – energy partner, despite Iran’s large population and little concern for efficiency in the domestic market (Moshiri, 2015). It’s political climate and relations both on the regional and international level are precarious. Until 1979, under rule of Shah Mohammed Reza Pahlavi, Iran was a key-ally of the US. The Islamic Revolution of that same year shifted power to Ayatollah Khomeini. The revolution and the kidnapping of US embassy personnel caused the deterioration of the US-Iranian partnership. As the authoritarian rule continued in Iran, diplomatic relations with the US never revived. The Iranian nuclear issue has ever since been a key priority for US foreign policy. Through economic sanctions agreed upon in the UN Security Council (SC) the US has tried to exclude Iran largely from international trade (and nuclear weapon

14 acquisition). China, as a permanent member of the SC, however, has maintained its diplomatic ties with Iran. Where American and European companies left Iran due to the sanctions, Chinese NOC’s – along with Iranian domestic actors (Jalilvand, 2017) – have increased their presence filling the ‘Western void’. Within this context China has been balancing between maintaining good relations with the US and securing its energy supplies from Iran. This is known as it’s ‘Persian Gulf Dilemma’ (Garver, 2006). The election of Hassan Rouhani in 2013 opened up the possibility for Iranian rapprochement with the West. The 2015 Joint Comprehensive Plan of Action (JCPOA), or nuclear deal, has started the process of lifting international sanctions on Iran. The deteriorated relations with the US and strengthened ties to China make energy supply security relations with Iran a relavant matter in international relations theory. The above outlined developments of recent years offer new possibilities for Western-Iranian relations. In the meantime, China gained a foothold in Iran. Many scholars (Dorraj and Currier, 2008; Dong, 2014; Jenkins, 2014) studied the specifics of the Sino-Iranian relations. Others have focused on the triangular relation between China, Iran and the US (Garver, 2006, 2009, 2011, 2013, 2016; Leverett and Bader, 2010). China’s energy relations and its multilateral strategy has also been researched thoroughly (Jiang & Sinton, 2011; Jiang & Ding, 2014; Szamosszegi & Kyle, 2011; Dong, 2014; Leverett & Bingbing, 2014). Vakhashouri (2015 and 2017) and Jalilvand (2017) have studied recent developments in the Iranian energy sector. However, an integrated and updated study of these research themes – the connection of Chinese multilateralism, NOC’s, the Iranian political economy and the recent political developments within Iran – is still missing. The presented thesis is the outcome of such a study.

1.1.4 Delineation of the research

Timeframe The start of the 2000s marked the beginning of the Chinese “Going-Out” strategy in order to sustain its economic development. The involvement of Chinese NOC’s in Iran was pioneered by Sinopec (also called China Petroleum & Chemical Corporation or Sinopec Limited). In January 2001, the Chinese national oil company acquired a 50-per cent stake in the Zavareh-Kashan block from the NIOC at the cost of $13 million (Dong, 2014). In 2014, Saudi Arabia, Oman, Iraq and Iran account for 44% of China’s crude oil imports, Iran alone accounted for 9% in 2014 (EIA China Report 2014). I consider Sinopec’s involvement in Iran as a key event, and starting point, for analyzing Sino-Iranian energy relation. Because the agreement on the nuclear deal (JCPOA) with Iran is less than two years ago, recent developments are crucial to take into account as well. Hence, the thesis’ period of time under study, or timeframe, will be from 2001 to 20171.

1 It has to be noted that Chapter 2, on the background of the Chinese energy situation, deviates from this timeframe. In addition, analysis in some parts will need to refer back to developments outside the timeframe. 15

Delineation of space The central theme of this study is the energy relation between China and Iran. These two countries will take a central position in the analysis. Within the Persian Gulf, the Strait of Hormuz is of key interest to China, Iran and the Middle East as a whole. A majority of energy exports from the region pass through this waterway. In addition, the Strait of Malacca is another ‘chokepoint’ that is essential to Chinese energy security as (almost) all of its energy imports pass through it (EIA, 2015). Energy transportation routes over land mostly constitute a network of pipelines through Central Asia.

1.2 Literature Review Ruling […] elites have an interest of their own to meet these demands to maintain order at home as well as for protecting the state against competitors in the international system. Those with a mandate to act on behalf of the state, therefore, process these demands into a workable strategy (Amineh & Yang, 2014).

The literature review aims to shortly research and present the crucial subjects that need to be studied in order to be able to answer the research- and sub-questions. These are divided into China, Iran and Sino-Iranian relations.

1.2.1 China

State structure in China China’s current state constitution describes its unicameral legislature, and the National People’s Congress (NPC) as the highest organ of state power (Lawrence, 2013). The NPC’s role includes supervising four other political bodies: 1) the State Council, the highest organ of state administration; it oversees the state bureaucracy and manages day-to-day administration of the country; 2) the State Central Military Commission, which directs the armed forces of the country; 3) the Supreme People’s Court, the highest judicial organ; and 4) the Supreme People’s Procuratorate, China’s top prosecutor’s office (ibid). Lawrence (2013; 2) states that “the Party commands the overall situation and coordinates the efforts of all quarters, and the Party must play the role as the core of leadership among all other organizations at corresponding levels.” The CCP’s constitution explicitly states that the Communist Party “persists in its leadership over the People’s Liberation Army and other armed forces of the people (ibid).” The Party exercises that leadership through a Party Central Military Commission. A likewise structure can be found when looking at the CCP’s influence on energy companies. Fundamentally speaking, in addition to state ownership, there are two channels through which the Chinese state aligns its financial system with its energy companies. First, it does so implicitly through the CCP’s human resources department; the Central Organization Department (COD). Basically, the COD appoints the top-tier executives of China’s energy SOEs and large state-owned financial institutions (SFIs). Second, the Chinese state forges the alignment through coordination between its

16 energy-germane and finance-germane bureaucracies (Kong & Callagher, 2016). The most prominent actor concerning company-control is the SASAC (State-Owned Assets Administration and Supervision Commission). The SASAC is overseeing Chinese energy companies’ cross-border expansion as a way to promote the preservation and enhancement of the state-owned assets in the country’s energy sector (Kong & Callagher).

Chinese going-out strategy and NOC’s Chinese immense economic development of the past decades has dramatically increased its energy needs. Consequently, China has become a net importer of oil in 1993 (EIA, 2015). Moreover, the Chinese ruling elite became aware that it had to guarantee its energy supply security in order to fuel its enormous economic growth, which resulted in an increased search for relations with resource-rich countries. Gradually, this has changed Chinese foreign policy from bilateral relations into a multilateral approach. However, there is a second, more implicit reason for this gradual transition towards multilateralism. The creation of the Shanghai Cooperation Organization (SCO) in 1996 was also the beginning of Chinese attempts, in cooperation with Russia, to limit U.S. influence in Central Eurasia and the Middle East (Amineh & Guang, 2014). President Xi Jinping first presented China’s vision for a “Silk Road Economic Belt” during a 2013 speech in Kazakhstan. The idea was to “forge closer economic ties, deepen cooperation, and expand development in the Euro-Asia region” (ibid). In early 2015, the contours of Beijing’s strategy began to emerge as China’s leadership laid out plans for this “Silk Road Economic Belt” through Central Asia, and a “21st Century Maritime Silk Road” through Southeast and South Asia (Zimmerman, 2015). China refers to these two combined as “One Belt, One Road” (OBOR). The most important tools for the Chinese multilateral approach are the national oil companies (NOC’s). These NOC’s are mostly regarded as ‘extended arm’ of the Chinese leadership (i.e.: the CCP)2. Sinopec pioneered the activities of Chinese NOC’s in Iran by acquiring a share in the Zavareh-Kashan oil-field in 2001.

1.2.2 Iran

Contrasting political factions

2 Mainly, the debate is divided into three ways describing the relation between the state (or CCP) and the NOC’s: 1) state-led, 2) independent or 3) hybrid. Within the presented thesis, the state-led approach is used. Dong (2014; 568) stresses this: “the biggest oil giants, including CNPC, Sinopec and CNOOC, who take the main responsibility for implementing energy policies on behalf of the Chinese government, set their own targets in terms of crude oil to be acquired overseas.” Cunningham (2016; 3), furthermore, argues that evidence suggests a less monolithic view of state influence and that “it is clear that Chinese energy SOEs are utilizing a degree of state financing”, but the relationship does not confirm that the “causal arrow of influence” points from Beijing to the firms. 17

The Islamic Republic of Iran (IRI) is unique in a sense that it combines a semi-theocratic mode of rule based on the velayat-e faqih system3 (the Governance of the Jurist). This system was institutionalized according to the constitution of 1979, with a constitutionally based rule of the people based on the constitution of 1906 (Rakel, 2009). According to Chehabi (2001), the IRI has characteristic features, which are inherent in both totalitarianism and authoritarianism. Apart from these governmental bodies and institutions the political elite consists of three different political fractions; the conservative, the pragmatic and the reformist fraction. These are commonly divided into the conservatives and the moderates (pragmatic and reformist faction). Rouhani’s election in 2013 – and his re-election in 2017 – have strengthened the hopes of a more liberal Iran. However, the most serious structural impediment constraining the Iranian president’s powers is his constitutional subordination to the Supreme Leader (Monshipouri & Dorraj, 2013). In addition, the tensions between the elected and unelected institutions of governance contribute to the non-functioning of Iranian politics (ibid). Much research is done on Rouhani’s capabilities in relation to regime change (Monshipouri & Dorraj, 2013), the cultural life (Abdolmohammadi & Cama, 2015), and on issues such as human rights, women rights, and the constraint on media (Singh, 2016). Many have emphasized the ‘stiffness’ in politics and the restricting role of conservatism in that regard (Rakel, 2009; Jalilvand, 2017). The factions are divided in their opinion about the energy sector and – mostly – foreign (western) influence in the industry, which is one of the central themes in this thesis.

The state-energy sector relation in Iran The implementation of the JCPOA occurs against the backdrop of intensive political struggle inside Iran (Jalivand, 2017) between conservatives and moderates. The conservatives and IRGC-affiliated entities have substantially benefited from the sanctions, because – in the absence of competition – they were able to improve their economic, and subsequently also political, position. The energy sector is one of the key industries that are constrained by conservative power. Traditionally, NIOC and its subsidiaries were in charge of running the Iranian energy industry. NIOC is controlled by the Ministry of Petroleum and hence by the government. During the Ahmadinejad presidency, however, the IRGC entered the energy sector. In 2011, President Ahmadinejad (himself a former IRGC member) even appointed Rostam Ghasemi (the head of Khatam-al Anbiya, the IRGC’s business conglomerate) as petroleum minister. Courted by the government, the IRGC sought to replace the void left behind by Western IOCs leaving the country. By 2013, when President Rohani assumed office, the IRGC had established a strong foothold in the energy industry. Rohani replaced Ghasemi with the experienced and technocratic Bijan

3 The theocratic part of the system constitutes of the religious supervisory bodies (the Council of the Guardian [Majles-e Khobregan], the Expediency Council [Majma’-e Tashkhis-e Maslahat-e Nezam], and the Assembly of Experts [Shora-ye Maslahat-e Nezam]). The republican institutions are legitimized by the people (the legislative [the Majlis, or Parliament], the executive, and the judiciary) (Rakel, 2009). 18

Zanganeh, who had already served as minister of petroleum (1997–2005) and minister of energy (1988–97). This is where moderates and conservatives clash in their opinion about the energy sector. The Iranian Petroleum Law (IPC), was formed as an consensus between conservatives and moderates, balancing between offering attractive terms to IOC’s (moderates) and the conservatives ‘resistance economy’ (conservatives). Regarding the JCPOA it seems that ‘resistant economic’-sentiments have been less successful. IOC’s are able to enter the country again, making it possible to regain the post- sanctions position that they had before withdrawal from the sector under US-led-sanctions (Jalilvand, 2017).

Geopolitical challenges for energy cooperation in Iran On foreign policy issues, Rouhani’s election presented a window of opportunity (Monshipouri & Dorraj, 2013; Juneau, 2014) compared to his predecessor Ahmadinejad. Events that have taken place during his first presidential term suggest a more liberal direction in Iran, and a more liberal energy sector. The agreement on the Nuclear Deal, or the Joint Comprehensive Plan of Action (JCPOA) in more formal terms, in 2015 and the consequential partial lifting of sanctions on Iran can be regarded was the first major step towards improvement of Iranian foreign relations. As stated above, the IPC constitutes another ‘liberal turn’. Rouhani and the officials surrounding him, especially Foreign Minister Zarif, have proven willing to engage with Washington on a transactional base (Singh, 2016) Despite these openings for cooperation with the West, Iran’s observer status in the Shanghai Cooperation Organization suggests otherwise. The SCO includes a number of Muslim Central Asian states that share religious and cultural affinity with Iran, as well as Russia and China (ibid). In December 2014, China and Central Asian countries agreed upon a contract to connect China’s western Xinjiang province to Herat in Afghanistan, from where it will connect to Iran (Zimmerman, 2015). Iran’s interest in the SCO appears to correlate with its anti-American agenda, as the SCO is often proclaimed by observers as a counterweight to the USA (Abkbarzadeh, 2015) or NATO (China Monitor, 2014). The implementation of the JCPOA has attracted the interest of IOCs from around the world. Throughout 2016, a number of companies moved to Iran, signing several Memoranda of Understanding4 (MoUs) (Jalilvand, 2017). An OPEC deal signed in November exempted Iran from production cuts and acknowledged pre-sanctions output levels as Iran’s reference production (ibid). However, to utilize the full potential of its energy riches, Tehran will need to attract international investment and technology. Otherwise, the Iranian energy sector will remain underdeveloped as the

4 These include, American-Dutch Schlumberger, British-Dutch Shell, Chinese CNPC, French Total, German Wintershall, Italian Saipem, Japanese Inpex, Norwegian DNO, and Russian Gazprom. Up to now, however, no contracts have been inked. The MoUs largely comprise field studies as preparatory steps. Only one consortium, comprising NIOC, Total, and CNPC, has signed a ‘heads of agreement’; this represents a step forward towards contract finalization. 19 country holds the world’s largest combined reserves of oil and natural gas (13 per cent of global total) (BP, 2016) but only accounts for some 4.7 per cent (BP, 2016) of worldwide production.

Iran and the Arab Spring The start of the Arab Spring intensified the instability of the Middle. Filiu (2011) states that there is a clear dichotomy between the Iranian and Western view on the Arab Spring: the Islamic Republic regards it as first step towards toward an Islamist order, as the West sees it as a movement towards greater rights and freedoms. Iranian wishes for the former fly against the reality of developments in North Africa and in the Gulf states, where many protestors have insisted that they are fighting for ‘freedom’ and ‘democracy’ (Parchami, 201). However, the outcome of the war in Iraq and the West’s inability or unwillingness to find a solution to the Israeli–Palestinian conflict played into the hands of Iran and the Islamists, reinforced Iran’s regional role and altered the Middle East balance between ‘resistance’ and moderates in favor of the former (Aliboni, 2011). Several sources (Baer 2009; Sanger, 2011; Tait, 2011; Warrick, 2011) argue that recent events have benefited the Iranian position, or at least compared to the U.S. position in the region. Others have disputed these findings and argued that the Arab Spring-movements view the IRI as ideological failure (Sadeghhi-Boroujerdi, 2011) and aim for similar movements as the Iranian Green Movement, leaving Iran far more isolated in the region than it is willing to acknowledge (Tait, 2011; Tisdall, 2011; Warrick 2011).

1.2.3 Sino-Iranian relations

China, Iran and U.S. policy: the triangular relation China and Iran are emerging powers with increasingly significant political and economic relations that have both regional and global dimensions (Dorraj and Currier, 2008). Over the past quarter century, China has been challenged to balance a major interest in maintaining comity with the United States against its efforts to develop multi-dimensional cooperative relations with important countries in the Persian Gulf - including countries in policy conflict with Washington (Garver, 2006; Leverett & Leverett, 2009). In 2014 more than half of China’s crude oil imports came from Middle Eastern countries. Iran itself accounted for 9% of these Chinese imports (IEA China Report 2014). The ‘balancing act’ between continuing good relations with the United States and Iran is called the ‘Persian Gulf Dilemma’. Knowing Chinese intentions is of crucial importance to American foreign policy. Garver (2011) states that it is difficult for outside observers to know whether Beijing is playing a dual game in Iran. China’s political system is not transparent, and foreign and security policy issues are well guarded. Two ‘opposing’ considerations need to be taken into account in thit respect. First, China is far from comfortable with the reality of American hegemony in the Persian Gulf – or elsewhere in the world, for that matter (Garver, 2009). According to Chinese media and scholars, the United States falsely imagines that it can – and does – impose its values and systems on the people of the Persian

Gulf (Garver, 2011). For the Islamic Republic of Iran specifically, Chinese analysts believe that the US is largely to blame for the bad state of US-Iranian relations (Garver, 2013). The second consideration is that China does not want to directly confront the US in the Middle East. China’s economic development significantly depends on export revenues to the US. Also, Chinese foreign direct investment sustains American consumption-levels and partly legitimizes the enormous national debt of the US (Morrison, 2011).

Sino-Iranian bilateral relations and diplomacy As civilizations with deep historical roots, rich cultural traditions and illustrious imperial pasts, the two countries have a basis for psychological identification (Dorraj & Currier, 2008). The above outlined Persian Gulf dilemma is at the heart of Chinese considerations to further engage in Iran. The vast Iranian resources, globally second ranked gas reserves and fourth ranked oil reserves, are making the country, in terms of reserves, a reliable energy supplier. During Supreme Leader Khomeini’s regime, his principle of “Neither West, nor East” had been translated into policies of isolationism (Garver, 2006). Rakel (2009) has stated that several developments of change accelerated after his death in 1989. First, the country became primarily preoccupied with the domestic economic difficulties. Second, a ‘new generation’ of reform-supporters that had not actively participated in the process of the revolution got more important. And third, the process of globalization also reached Iran; developments in media, information, and communication connected people over the world with distinctive discourses on world peace, human rights, and democratic issues. Whereas there was a short declaratory policy change in US-Chinese relations, the 1990s meant a built-up for anti-hegemonic sentiments within the Sino-Iranian relations. China supported Iran and disapproved former US president Bush’ statements in which he proclaimed Iran, North Korea, and Iraq in an “axis of evil.” (Garver, 2006). The increasing amount of Sino-Iranian contacts are reported by the Ministry of Foreign Affairs of the People’s Republic of China. Analysis of this record will be performed in chapter 3.

Research on the military cooperation between China and Iran is diverse. Dorsey (2016) has researched the increased involvement of China in Iran during the Iran-Iraq War in the 1980s. This research is supplemented by analysis done by Wuthnow (2015), on the specifics of Chinese military deliveries towards Iran. Furthermore, Garver (2016) has researched increasing military cooperation, which is supplemented by other findings of Dorsey (2016).

Chinese NOC’s and investment in Iran The China Global Investment Tracker (CGIT) by the American Enterprise Institute (AEI) provides a comprehensive data set covering China’s global investment and construction activities. The data set reveals that in the period from 2005 up till now Chinese companies have invested in the metal sector (9 transactions), energy sector (7), transport (6), utilities (1) and real estate (1). These purchases are

21 examples of FDI in company-assets by a variety of companies. Not all transactions of Chinese companies in the Iranian economy are left aside of public scrutiny. In their study of Iran’s Chinese energy partners, Mark Dubowitz and Laura Grossman (2010) identified 89 instances in which the U.S. government sanctioned Chinese entities (many of which were state-owned enterprises) for transferring restricted items to Iran between 1997 and 2010 (Garver, 2011).

A major role in Chinese foreign relations, especially when it comes to energy, is in the hands of the Chinese national oil companies (CNOC’s), as outlined above. China’s major NOC’s are CNPC, Sinopec and CNOOC. In its Annual Report 2015 CNOOC reports that, by means of two of its subsidiaries (COOEC and CNOOC EnerTech), it is active in the Iranian energy sector. The CNPC Annual Report 2015 states that in Iran, the North Azadegan project began trial production and the MIS project progressed smoothly to resume production. It also engages in other drilling and ‘well logging’ activities in the country, according to the report. On overseas technological development CNPC stresses that; “to promote the global application of our new technologies, we set up an overseas technical support center for R&D and services, as well as interpretation and evaluation of well logging data” (CNPC, 2015). Sinopec does not have any report on activity in the Iranian energy sector in its Annual Report 2015. From the dataset provided by the CGIT we can conclude that their last equity purchase in Iran dates back to December 2007, which was a majority share in National Iranian Oil. More recent reports or articles (Vakharhouri, 2015, 2017; Jalilvand, 2017) show that Sinopec is active in Iran.

1.3 Theoretical and conceptual framework This section of the research design is aimed to introduce the theory that is used as a framework for the thesis. Subsequently, the theory is concretized in some central concepts that are considered most accurate to explain the dynamics of Sino-Iranian energy relations.

Critical Geopolitics International Relations (IR) and International Political Economy (IPE) differentiate on the definition of the unit of analysis and the level at which that unit is to be studied (Amineh & Guang, 2014). Classical scholarly debates tend to focus on access to resources, while ignoring the economic aspects of energy security, such as security of demand (Keating et al., 2012). They center on states as the unit of analysis, while ignoring the ever-growing role of transnational actors, such as national energy companies, as well as global externalities and spill-overs. Furthermore, these theories tend to marginalize the role of international cooperation in energy and developments in international law and treaties, even though these remain important bases of interstate economic interdependency. Neoliberal approaches, in turn, tend to negate the possibilities of political change in energy relations (Keating et al., 2012).

This thesis aims to take a more analytical stance and loose the state-centric analysis. Therefore a critical theory-approach is chosen. This type of analysis has gained legitimacy at the end of the last century. The core-periphery structure of dominance is maintained not just by external pressures but also with the support of dominant classes or elites in the periphery country who benefit from the relationship (Cox, 1992). Agnew (1994) argued that mainstream IR theories rely on three geographical assumptions: states as fixed units of sovereign space, the domestic/foreign polarity, and states as ‘containers’ of societies. By geopolitics, Agnew and Corbridge (1995) understand the division of global space by institutions (states, firms, social movements, international organizations, armed forces, terrorist groups, etc.) into discrete territories and spheres of political-economic influence through which the international political economy is regulated materially. One a global level, perspectives on geopolitics are contesting each other. Walter Russel Mead (2014) has rejected Fukuyama’s The End of History and the Last Man5 and stressed the intensified geopolitical battle on the Eurasian continent. His analysis is mostly based on the intentions of ‘revisionist states’ China, Iran and Russia. He argued that these states challenge the U.S.-led liberal world order. Ikenberry (2014) states that Mead gives a false picture of the “illusion of geopolitics”. He regards Russia and China, and to a lesser extent Iran, as ‘occasional spoilers’ of the world order that is maintained by the West. He states the international process of democratization has started before the end of the Cold War (i.e.: the 1970’s) and that this has strengthened the network of alliance tied to the liberal world order. Amineh and Houweling (2003; 315) state that “critical geopolitics merges elements borrowed from political realism, from two domestic-society schools and from constructivism and enriches that mixture with spatial variables”. Like Harvey (2003), Amineh and Guang (2014) consider geopolitical orders also to be ‘geo-economic’. The current structure of the post-Cold War international system is a combination of regional and sub-regional, international geo-economic systems. Boundaries between domestic and global issues have become blurred (ibid). Furthermore, Amineh and Guang also highlight the role of IOC’s as a principal means of advancing national interests and as an instrument of national power projection. After introducing the theory on Rentier States I will elaborate on the central concepts of Critical Geopolitics.

Rentier state theory (RST) Many countries that possess a large amount of natural resources are considered to suffer from the so- called ‘resource curse’ or are typified as ‘rentier states’. Gray (2011) states that rentier state theory seeks to explain the impacts of external payments – or rents – on state-society relations and governance. The theory has typically been used for the Gulf states and other resource-rich parts of the

5 The end of History? was Francis Fukuyama’s initial essay, published in 1989. In 1992 he wrote the book The End of History and the Last Man as an elaboration on his essay. The main concept that was developed within the essay and book stated that the democratic liberal state was an ‘end-state’. 23 world. Lately, a theory of ‘late rentierism’ has gained ground, that overcomes the shortcomings of the classic rentier state theory. Hussein Mahdavy (1970) laid down the foundations of rentierism for Iran. He defines rentier states as countries that receive on a regular basis substantial amounts of external rent. Mahdavy (1970) highlighted the fact that rentier states do not have the constraint of lacking savings or foreign currencies, that other underdeveloped countries have. It could be argued that the socio-political structure of these countries, combined with disguised colonialism, is not conducive to rapid (economic) growth (ibid). These notions are partly mirrored by the concepts, outlined in the next section

Concepts Hence, the critical geopolitics approach provides a number of concepts. Energy security can be defined as the availability of energy at all times in various forms, in sufficient quantities and at reasonable and/or affordable prices, without an unacceptable or irreversible impact on the environment (Yergin, 1988; Amineh and Guang, 2014). Energy security can be analyzed through the energy scarcity model. Amineh and Guang (2014) have discussed three possible ways in which energy scarcity can occur: demand-induced, supply-induced and structural scarcity. Demand-induced scarcity refers to a situation in which population growth, a rising per capita income resulting in higher levels of consumption and technological change, which renders fossil fuels more essential for the production of wealth and power, increase domestic demand for fossil fuels. Supply-induced scarcity refers to a situation in which i) a decrease in stock (or market-efficient access to it), ii) inefficient use of supplies, and iii) a lack of adequate productive capacity and pipeline infrastructure, reduce the supply of energy resources. Structural scarcity refers to a situation in which there is a supply-induced scarcity caused by the deliberate action of a major power or non-state actors, such as transnational oil companies and producer cartels such as OPEC. To reduce the instability of energy supply through the scarcity model, states have increasingly engaged in energy relations in order to secure energy supply. The core pillars of such energy relations are diplomacy, trade and investment. Diplomacy is executed by the central government, commonly represented by official state visits. Following the state-relations, trade and investment relations are executed by companies. Furthermore, critical geopolitics stresses the centrality of concepts as power projection and state-society complexes. The former is the analysis of powerful states or regions (e.g.: EU also performs power projection) and their domination across borders in order to secure resources. Regarding the latter, Amineh and Guang (2014) state that there are two ideal types of state-society(- market) relations; the liberal state-society and the authoritarian state-led society. The latter is characterized by the relative differentiation between state and society: the ruling and governing groups, which are, to some extent, separated in the liberal state-society. Lateral pressure refers to the development of socio-economic forces released by market actors. These social forces induce

24 incentives in governments under stress to expand beyond borders as the capability to do so improves in absolute and relative terms (ibid).

1.4 Brief argumentation and hypotheses In order to answer the central question in this research it is needed to connect the actors involved in the topic to the central themes and concepts. That means that the units of analysis need to be defined. These are the following: 1. (The Chinese leadership concentrated in) the CCP; 2. The Iranian political factions and bodies that influence energy policy; 3. Chinese NOC’s active in Iran. Furthermore, other state- and non-state actors will be discussed that are related to the topic, although they are not considered as actors under study. These actors need to be tied to the central concepts of this thesis. The concepts have been discussed in the previous section. Concepts for this study are both domestic and international. Chapter 3 contains three section, two sections on the domestic dynamics in China and Iran and one section on the relation between the two.

Actors China’s enormous population and rapid economic growth have legitimized its fast growing position in world politics. In order to facilitate such a position, it’s foreign policy has shifted towards a multidimensional and multilateral approach (Leverett & Bingbing, 2014). This process has been developed over the past decades. The role of the CCP in that development has been evident (Lawrence, 2013). Therefore, the CCP is a crucial actor and therefore an important unit of analysis in this thesis. Changing the perspective from the domestic policy to international or multilateral policy, means shifting analysis from the CCP to the NOC’s. China’s diplomatic, economic and military policies have been shaped by energy supply security. For China, the three major NOC’s are CNPC, CNOOC and Sinopec and they have a crucial position in the Chinese Going Out strategy (Jiang & Sinton, 2011 Since the Islamic Revolution of 1979, conservative clerics have ruled Iran (Rakel, 2009). Moderate presidents have been elected, but so far have been unable to loosen the grip of the conservatives that are all over the political system of the IRI (ibid). Mayor policies under current moderate president Rouhani, such as the introduction of the IPC and the JCPOA, might constitute change. However, as the literature review has outlined, the power structure within the political elite of Iran is complex and stiff. The Supreme Leader, IRGC, and the religious bodies have large interests and influence in the energy sector (Jalilvand, 2017). Therefore, it is crucial to research the political factions scattered over the complex system of the Iranian political elite and its relations to the energy sector.

Hypotheses The research questions in combination with the literature review and argumentation have resulted in the formulation of the three following hypotheses:

Hypothesis 1. The state-society-market relations in Iran and China have facilitated ever-deepening energy relations in the last 17 years.

Hypothesis 2. Chinese efforts in diplomacy, trade and investment have ‘shielded’ Iran from the increased international sanctions on the country.

Hypothesis 3. Sino-Iranian energy relations will continue to enlarge, despite the domestic and international geopolitical and geo-economic challenges.

1.5 Research method The research in this thesis is based on qualitative data. The qualitative data is partly derived from book chapters, peer-reviewed journals specialized in energy policy, energy relations, and geopolitics. The leading journals on energy-related issues are Energy Policy, Energy and Energy Economics. They provide the base for the argumentation that is elaborated on in this thesis. Furthermore, these journals contain key insights in over-time development of policies regarding energy politics. For Iran and the Middle East, leading academic journals are Journal of Iranian Studies; International Journal of the Middle East Studies; The Journal of the Middle East Studies; The Middle East Studies. For China, the Journal of contemporary China; China Quarterly; China Journal are reliable academic sources. These academic works are supplemented by news articles from mayor journals, mainly Reuters, New York Times, Al Jazeera, CNN, and the Financial Times. These are able to explain more recent developments in the field and provide additional insights. Chapters 2, 3, and 4 contain the research results of this thesis in sequential order. Chapter 2 will describe the development towards China’s current energy situation. Chapter 3 contains the three ‘buildings blocks’ for the Sino-Iranian relations; China, Iran, and their relations. Following from this, challenges to the Sino-Iranian relations will be discussed in Chapter 4. Variables to conceptualize – and quantify – relations between China and Iran will predominantly be based on primary. These are trade numbers, diplomatic activities, GDP-dependence on oil in Iran, military spending, investment numbers, and other indicators that enhance the Sino-Iranian energy relations. Institutions that have published key reports on essential topics of this thesis are; Energy Information Administration (EIA); International Energy Agency (IEA); The Global Statistical Energy Yearbook; The Heritage Foundation, China Global Investment Tracker; CIA World Factbook; and the World Trade Organization (WTO) and the International Monetary Fund (IMF). Company reports also provide useful information. The Annual Reports China’s largest NOC’s entail information about their activities in Iran. Furthermore, NIOC publishes essential information about the Iranian energy sector. BP publishes the Annual Energy Outlook and the Annual Review of World Energy which contain key

26 global energy data. Government-data is selectively used as well. The Ministry of Foreign Affairs of the PRC and the Central Bank of Iran are the most prominent examples. So, the argumentation outlined by the academic sources is supplemented by the primary data. This results in findings about the direction, change and strength of Sino-Iranian energy relations. Essentially, the data collection method outlined above results in two case studies and an analysis of the relation between the two cases. The two single cases studies on Iran and China are mainly focused at providing a background. The aimed results of research primarily need to explain the relation between the two cases, namely the Sino-Iranian energy relations.

1.6 Structure of the thesis This chapter has outlined the research design for this thesis. Chapter 2 will analyze how China’s development has pushed its policymakers into formulating energy supply security-policies. In addition it will outline the current Chinese energy situation and the problem of energy scarcity. The aim of this chapter is to understand the forces that have pressured China into securing its natural resources outside its borders and stress the importance of fossil fuels in that regard. Chapter 3 will constitute of three parts. First, China’s energy situation that was outlined in Chapter 2 will be connected to its foreign policy. It will be argued that the foreign policy is closely connected to its energy supply security. The influence of the CCP in the domestic leadership and policy-making will be analyzed. After that the role of the NOC’s in Chinese multilateralism will be researched. In the second part, Iran’s political system and economy will be outlined. In addition the section will take a closer look at the hydrocarbon industry in combination with the political economy of energy in the country. The last part of the chapter will analyze the relation between the two countries. This chapter will analyze the Sino-Iranian diplomatic, trade, and investment – through the NOC’s – relations. The aim of this section is to research the Sino-Iranian relations, as well as the two countries separately. In the fourth chapter, analysis will shift from the elements that enhance the Sino-Iranian relations to possible challenges it faces. These challenges are mainly geopolitical and geo-economic. Furthermore, the challenges are both domestically and outside the borders of the two countries. It will be argued that the challenges coming from Iran are (predominantly) political, socio-economic, and technical. Furthermore, the IPC and JCPOA have attracted IOC’s to the country, increasing the competition for upstream projects in the Iranian upstream industry. Internationally, several factors contribute to the geopolitical challenges. The upheaval in the Middle East align countries and groupings, transcending sovereign state-borders that could potentially influence the Chinese activities in Iran. Within the Chinese-led multilateral framework of institutions, special attention will be given to the Shanghai Cooperation Organization. Finally, chapter 5 will contain the conclusions to this thesis. It will connect the most prominent findings of chapters two, three and four to the research design set out in chapter one.

Chapter 2: Background

2.1 Introduction The purpose of the following chapter is to establish where China’s need to engage in energy relations comes from. It will (briefly) research the background of the Chinese energy scarcity and clarify the development towards – and the state of – the current Chinese energy situation. In order to provide a structured background, the chapter is divided into several paragraphs. Section 2.2 researches the (historical) foundations of the current energy situation. First, the section aims to provide a historical overview of the market reform period in China, starting in the 1970’s. Despite, being out of the formulated timeframe for analysis, this is considered essential information to stress in this thesis as background for research. Furthermore, this section will have a more descriptive character. The analysis outlines how present relations between the state and energy sector are so close. In section 2.3 research will focus on the current Chinese energy situation. First, in section 2.2.1, the energy mix and its implications will be outlined. Section 2.3.1 and 2.3.2 will give an overview of the, respectively, oil and gas production and consumption of the Chinese economy. Finally, in the conclusion, the central questions and findings of the background analysis will be recapped. The questions that are addressed in this section are how the Chinese energy situation has changed over the last decades and what this has meant for energy usage and policy in China.

2.2 Background of Chinese state-energy relations

Chinese domestic development China, from 1949 onwards also known as the PRC, could for a long period of time be regarded as a ‘closed economy’, or ‘socialist self-reliance approach’ as Li and Clark (2010) label it. An historical transformation started in China at the end of the 1970’s when some mayor changes in economics, politics and development shifted the course of the country (Li & Clark, 2010). The ‘Dengist China’6 took the capitalist mode of economic development based on privatization of ownership and the means of production and distribution, to the marketization and allocation of resources including the total acceptance of economic inequities and political privileges (ibid). Mainly, the period from 1978 until 2008 is regarded as the ‘opening up’-phase (Sullivan, 2012; Walter & Howie, 2012; Li & Clark, 2010), from which 1992-2005 were the years of reform (Walter & Howie, 2012). Two main factors have accelerated this process. First, international developments (i.e.: fall of the Berlin Wall; collapse of the Soviet Union) and, second, American influence – unwanted by the CCP leadership7.

6 Deng Xiaoping was one of the main capitalist challengers of the communist Mao administration. 7 Sullivan (2012) showed that internal CCP documents accused the Bush-administration in 1991 of attempting to bring about the collapse of communism (in the country) through “peaceful evolution”. 29

The basis of this capitalism put emphasis on market-oriented science and technology as the essential productive forces, along with the promotion of the interests of the privileged, professional and entrepreneur classes, to also include the commercialization of welfare and social security (Li & Clark, 2010). The central government aimed to take advantage of the immense population resources8. Not at least because of its advantage compared to Western populations9. When energy shortages threatened the economic development in the early 1980s, energy conservation and energy efficiency became important elements of China’s government (Nakajima, 1982). Administrative measures were put in place during those years, which resulted in two decades of declining energy intensity (Andrew-Speed, 2009). The Five-Year-Plans (FYP’s), issued by the central government, were important tools to convert the economic potential into policy goals. To fuel the economy, the sixth FYP (1981-1986) focused on the expansion of energy supplies and specified targets for coal, oil, and electricity production (Li & Clark, 2010). Considering the scale of the national economic development goal, the government forged ahead to promote the development of renewable energy – hydro power in particular – and called for energy conservation to compensate for restrictions caused by the low level of energy technology (Yao & Chang, 2014). In October 1984, CCP-party congress approved the ‘Decision on the Reform of the Economic Structure’, which aimed ‘to build socialism with Chinese characteristics’, paving the way for further market expansion (Peng and Chen, 2011; Vogel, 2011). It officially gave legitimacy to comprehensive market reform in China and reduced the scope of central planning and at the same time, expanded enterprises’ operational autonomy (Yao & Chang, 2015). The 1990s gave rise to two major changes in the structure of the Chinese energy industry: it shifted from an exporting to an importing industry, and from state-led to more business-led10. The transformation from net exporter to net importer of energy, in 1993, put energy more central on the Chinese political agenda. In 1998, Premier Zhu forcefully carried out a major streamlining of central government agencies that reduced their staffing by over 50 percent and eliminated the great industrial ministries (e.g.: Ministries of Mining, Coal, Metallurgy, Petroleum, etc.) (Walter & Howie, 2012). Consequently, the ministries transformed into small bureaus that needed to regulate the newly created companies in their sectors. These companies are the current ‘state-led enterprises’ (SOE’s), and in the energy sector known as ‘national oil companies’ (NOC’s)11. Initially these companies were overseen

8 The introduction of Household Responsibility System (HRS), the rise of township and village enterprises (TVEs), and the allowance for ‘market’ and enterprises to play their dual roles in the national economy—all reflected this thought of decentralization and the government's reform measures at the micro-level (Yao & Chang, 2015). 9 The size of the Chinese population (1,37 billion, CIA World Factbook), like that of India (1,26 billion) is at the heart of its immense economic potential for the future, even more so when compared to the traditional Western populations of the EU (515 million) and the US (324 million). 10 Illustrative for the new investment climate that characterized China from the 1990s onwards were the major Western (particularly US-) banks that carried out IPO’s of Chinese (poorly managed) industrial companies for a total amount of 73.2 billion dollars in the period between 1997 and 2006 (Walter & Howie, 2012). 11 The objectives were to introduce competition; promote economic efficiency and a wider share of ownership; subject SOEs to market discipline; develop a national capital market; raise tax revenues to the state and reduce government outlays (Jiang & Sinton, 2011). 30 by the State Economic and Trade Commission (SETC). In 2004, the State-owned Assets Supervision and Administration Commission (SASAC) was created to bring order to the SOE’s (and NOC’s). The complex structure in which these governing bodies, institutions, and companies operate is shown in Figure 2.1. It partly explains the present close ties between the government and the energy sector. The role of the (Central) Organization Department (COD) (in the left-upper corner of Figure 2.1) and it’s connection to the executives (chairmen and CEO’s, connected by the arrow ‘appoint’), is elaborated on more thoroughly in the next chapter.

Figure 2.1 The reformed Chinese energy sector

Notes: NEC = National Energy Commission, SASAC = State Assets Supervision and Administration Commission, MOF = Ministry of Finance; MOFA = Ministry of Foreign Affairs; NDRC = National Development and Reform Commission; NEA = National Energy Administration; CBRC = China Banking Regulatory Commission; SOE = state-owned enterprise. Source: Jiang, J., & Sinton, J. (2011). Overseas investments by Chinese national oil companies. IEA Research Report.

From exporter to net importer Since 1993, China’s total energy production has been below its total energy consumption (Cheng, 2008; EIA, 2014). Consequently, the country pursuit for fuels to keep its economic development running at the same speed as previous decades needed to be extended to outside its borders. As outlined above, the transition to market economy required the creation of new organizational structures within the government. A plan for the institutional reform of the State Council was adopted in February 1998 to establish a government administrative system suitable for the ‘socialist market economic system’ (Peng and Chen, 2011; Vogel, 2011). This round of restructuring led to the decentralization of leadership in various government departments in the energy sector, which are outlined in Figure 2.1.

Since the end of the 1990s, the pace of Chinese investments in foreign oil and gas resource has accelerated greatly. According to International Analysis (2015) on China by the EIA, are most of the overseas investments located in regions with frequent ethnic conflicts, political chaos, and even local wars. The Middle East, for example, as one of the major hosting regions for Chinese NOCs, is a region of key strategic importance for future investments. This makes the Chinese quest for energy security vulnerable to developments in regional relations. On the one hand, the Chinese government pursues a wide range of interests via involvement in the oil sector in the region; on the other hand, certain governments of Middle Eastern countries use China’s interests in their resources as a counterbalance to the western countries (Yao & Chang, 2015). This balancing between different interests is also done by China and is further elaborated on in the next chapter. Considering the vulnerability of these interests, apart from looking outside its borders to secure energy supply, China has put emphasis on the use of renewable energy. This process has started in 1992, in the year that the country also became a net importer. In that year China’s Agenda 21 was issued which showed the strong willingness to support renewable energy (Yao & Chang, 2015). Consequently, several policies regarding renewable energy-technology development have been put forward12. All these policies promoted energy technology development in China, but the pace of development could not keep up with China’s growing appetite for energy. Therefore, the next section will look into the current Chinese energy situation.

2.3 The current Chinese energy situation In recent decades China’s domestic development, as outlined above, has given the country a position at the top of the international energy market. According to the International Monetary Fund (IMF), China's annual real gross domestic product (GDP) growth slowed to a reported 7.4% in 2014, which was the lowest since 1990, after registering an average growth rate of 10% per year between 2000 and 2011 (EIA, 2015). China developed from 1992 to 2013 into the world’s largest importer of petroleum products and other liquids (EIA, 2015). Furthermore, the country also quickly climbed the ranks of oil consumption. In 2014 it accounted for 43% of the world’s increase in oil consumption growth. The country is still ranked 2nd after the United States when on oil consumption. EIA forecasts that China's oil consumption will exceed that of the United States by 2034 (ibid). However, the vast majority – in fact, two-third – of China’s total primary energy consumption is still based on coal. The second largest source is petroleum and other liquids, accounting for nearly 20% of the country's total energy consumption. Usage of other sources is still marginal. Although China has made an effort to diversify its energy supplies, hydroelectric sources (8%), natural gas (5%), nuclear power (nearly 1%), and

12 In 1994, the State Planning Commission (SPC) formulated the ‘Brightness Program’ and ‘Ride the Wind Program’ (NREL, 2004). In 1996, the State Economic and Trade Commission (SETC) advanced the ‘Nine Five- Year Plan of Industrialization of New and Renewable Energy’. In 2001, the SETC proposed the ‘Tenth Five- Year Plan for New and Renewable Energy Commercialization Development’. In 2003, the Renewable Energy Promotion Law was promulgated (Yao & Chang, 2015). For detailed information see (NREL, 2004). 32 other renewables (more than 1%) accounted for relatively small shares of China's energy consumption, as shown in Figure 2.2.

Figure 2.2 Total primary energy consumption in China by fuel type (2012)

Source: EIA Country Analysis Brief China 2014

The Chinese government is planning to further decrease its coal use to 62% of its energy-mix in 2020 and claims that it accounted for 64,2% of the mix in 2014, instead of the 66% reported by the EIA. In the mid-2000s the coal industry lacked serious governance (Daojing, 2006). It is the largest coal producer and consumer world-wide and also has the largest number of deaths in mine accidents, and enormous environmental costs. Consequently, the Chinese government set a target to raise non- fossil fuel energy consumption to 15% of the energy mix by 2020 and to 20% by 2030 in an effort to ease the country's dependence on coal. In addition, China is currently increasing its use of natural gas to replace some coal and oil as a cleaner burning fossil fuel and plans to use natural gas for 10% of its energy consumption by 2020.

2.3.1 Oil In the foreseeable future, however, fossil fuel-use is – and will be – at the heart of the Chinese energy mix. From the moment China became a net importer of crude oil onwards, the consumption of petroleum products kept increasing sharply – and at a higher pace than its economic growth – whereas its production of crude oil only increased at a moderate rate. In 2014, China produced nearly 4.6 million barrels per day (b/d) of petroleum and other liquids, of which 92% was crude oil and the remainder was non-refining liquids and refining gain. EIA forecasts China's oil production will increase slightly to higher than 4.6 mb/d by the end of 2016 (EIA, 2014). In the medium and long term, EIA predicts China's oil production will grow incrementally to 5.1 mb/d by 2020, 5.5 mb/d by

2030, and 5.7 mb/d by 2040, based on the International Energy Outlook 2014 (IEO2014). China consumed an estimated 10.7 mb/d of oil in 2014, up 370,000 b/d, or almost 4%, from 2013. Notably, China became the largest global net importer of oil in the first quarter of 2014, surpassing the United States, and the country's average net total oil imports reached 6.1 mb/d in 2014. Significant U.S. oil production from shale oil and rapid Chinese oil demand growth, occurring simultaneously over the past few years, pushed China ahead of the United States as the largest importer.

Figure 2.3 China's oil production and consumption from (1993 – 2016)

Notes: Numbers in million barrels a day (mb/d) Source: EIA Country Analysis Brief China 2014

2.3.2 Gas Natural gas still constitutes a small part of the Chinese energy mix, adding up to only 5% of the primary energy consumption. The use of this resource, however, is growing significantly due to heavy investment in upstream development and greater import opportunities (EIA, 2014). China held 164 trillion cubic feet (Tcf) of proved natural gas reserves in January 2015. It more than tripled natural gas production to 4.1 Tcf between 2003 and 2013. FGE estimates that natural gas output continued rising in 2014 to more than 4.4 Tcf (EIA, 2015). The government targets 6.5 Tcf of natural gas production by 2020 in line with its desire to use more natural gas to replace other hydrocarbons in the country's energy mix. It anticipates increasing the share of natural gas as part of total energy consumption to at least 10% by 2020 to alleviate high levels of pollution resulting from the country's heavy coal use. In line with th small portion of natural gas in the energy mix and the recent government’s focus to increase its usage, China has only quite recent become an net importer of natural gas. Its consumption started exceeding domestic production in 2007, as can be noted in Figure 2.4. Consumption rose to 5.7

Tcf in 2013, 12% greater than 2012 (EIA, 2014). The country imported about 1.8 Tcf of liquefied natural gas (LNG) to fill the gap. Although the majority of gas consumption stems from industrial users (32% in 2013), the shares of gas consumption in the power and transportation sectors have been rising over the past decade.

Figure 2.4 China's natural gas production and consumption (2000 - 2013)

Source: EIA Country Analysis Brief China (2014)

2.4 Conclusion The analysis in this chapter was structured around the background of the current Chinese energy situation. The first section provided the historical background of the Chinese political system in connection to the energy sector. It sought to outline how government policies such as formulated in the FYP’s were translated into changes in the energy market. The establishment of the administrative bodies framework, as outlined in section 2.2, is an example of this. Following, the section outlined how the rapid Chinese development changes its position in the world energy market. The second section focused on the current Chinese energy situation. As can be seen in the distribution of Chinese primary energy consumption, the use of coal is still at the heart of the Chinese energy mix (section 2.3). The Chinese leadership has sought to diversify from this polluting energy source, mostly with enhancing the relatively small usage of gas (2.3.2). Furthermore, oil consumption and production have departed ways since 1992 resulting in the need for oil imports, as outlined in section 2.3.1. All these results together stress the inevitability for the Chinese leadership to look outside its borders to fuel the rapid economic growth. To be more precise, it illustrates the importance of energy supply security.

Several conclusions can be drawn from this chapter. First, the Chinese development has caused China to become a net importer of oil in 1993 and a net importer of gas in 2007. The gap between oil production and consumption is enormous, which puts increasing pressure on oil imports. Gas imports, on the other hand, started increasing later, mainly in response to the objective of the Chinese leadership to reduce the polluting usage of coal. So, as a result of the increased share of imports during the last decades, China is now highly dependent on foreign energy to maintain its economic development. The consequence of this dependence is that it has started to engage in energy relations with other countries. How it does so, and who influences this policy, is the central theme of the next chapter.

Chapter 3: The Sino-Iranian Energy Relations

3.1 Introduction Following the previous chapter where the background of the Chinese energy consumption was provided, this chapter focuses on the politics-energy relations in China and Iran, both domestic and bilateral. Whereas Chapter 2 had a predominant descriptive character, Chapter 3 is more analytical. EIA forecasted that China's oil consumption would continue growing through 2016 at a moderate pace to approximately 11.3 mb/d. China's oil consumption growth is forecast in IEO2014 to rise by about 2.6% annually through 2040, reaching 13.1 mb/d in 2020, 16.9 mb/d in 2030, and 20.0 mb/d in 2040. Chapter 2 has outlined that China is still heavily relying on fossil fuels. Imports continue to be of crucial importance, as domestic production has stagnated. In that regard, it’s important to build strong relations with resources-rich countries that must secure the Chinese energy supply. In this thesis, Iran will be the case study for Chinese energy supply security. In order to perform such analysis, both countries, as well as their mutual relations are analyzed. Section 3.2 discusses the most important ties between the Chinese power structure, the energy supply security, and the national oil companies (NOC’s). Section 3.2.1 analyses the central role of the Chinese Communist Party (CCP) and its influence over the energy sector. From the Communist Party, analysis will shift towards the Chinese Going Out Strategy and the central role of NOC’s in section 3.2.2. The third section seeks to analyze the dependence of Iran’s ruling elite and the society they rule on the hydrocarbons industry. It will conceptualize Iran as an authoritarian rentier-state, and illustrate why it does so. In Section 3.3.1 the political economy of energy in Iran is discussed. One of the most notable developments in recent years is the shift from buy-back contracts to the Iran Petroleum Contract (IPC). After that, the Iranian hydrocarbon industry will be discussed in section 3.3.2. The main focus in this section is the relation between the state and the oil sector. It will argue that Iran – and its ruling elite – is highly dependent on income from oil. The final section analyzes the Sino-Iranian energy relations. Analysis will first focus on Sino- Iranian diplomacy and trade (Section 3.4.1). After that, the activities of Chinese NOC’s in Iran will be discussed, furthermore, the military cooperation will briefly be analyzed. Section 3.5 will combine all the above mentioned findings.

3.2 State, energy security and NOC’s in China China’s rapid economic growth of the last decades has increased the need for natural resources to fuel its economy. The country is investing largely in renewable projects, from which hydroelectric power is the main source, with 8 percent of primary energy consumption (EIA, 2015). The majority of its energy use, however, is still based on coal (66 percent) and oil (20 percent). Bilateral trade relations have transformed into a multilateral strategy, with a focus on the Eurasian continent. The central

37 government’s most powerful tool for administrating this strategy were the State Owned Enterprises (SOE’s). For the energy sector the SOE’s are known as the national oil companies (NOC’s). This section seeks to research the relations between the government (in which the Communist Party has a key role), its energy supply security and the central role of the NOC’s.

3.2.1 The Chinese state and energy supply security The CCP has, until today, remained at the heart of Chinese power. With 85 million paying members, just over 6% of China’s population, the CCP is the largest political party in the world. As noted above, it is China’s dominant political institution, exercising leadership over the entire political system (Lawrence, 2013). In addition, private property is not the central organizing concept of the Chinese economy; rather, the central organizing concept is tied to control and ownership by the Communist Party (Walter & Howie, 2012). Given this basic premise, markets – and more broadly, civil society as a whole – cannot be used as the means to allocate scarce resources and drive economic development. The transition from governmental-control to business-control of the important sectors, mainly seems to illustrate a shift in the juridical constitution of the sectors organization than it is of the actual control of the sector. Brødsgaard (2012) has investigated the link between business groups and the so- called nomenklatura. The nomenklatura can be defined as “a list containing those leading officials directly appointed by the [Chinese Communist] Party as well as those officials about whom recommendations for appointment, release or transfer may be made by other bodies, but which require the Party’s approval (Brødsgaard, 2012).” The Central Organizational Department (COD) is in charge of handling one of the two nomenklatura lists. Brødsgaard’s key finding was that: “even though SASAC was charged with the appointment and management of leadership positions in the central SOEs, 53 of the most important corporations were in fact on the central nomenklatura list and therefore managed not by SASAC but by the CCP’s COD13.”

Energy supply security: domestic energy use During the past three decades, China’s GDP has enjoyed an average growth rate of 9-10 percent, and since 2002, China’s energy consumption has been growing at a faster rate than its GDP growth (Li & Clark, 2010) – exceeding it by 5 percentage points, according to Daojing (2006). There is no sign that China’s energy consumption will slow down, on the contrary, it will steadily increase. This trend is in line with that of the last decades. Figure 3.1 depicts the ongoing leveling trend in relative total primary energy consumption between the OECD-countries14 and China. The rapid increase in Chinese primary energy consumption that is half the energy of all the OECD-countries together, compared to an one-

13 The executives have ministerial-level status and ranks and the companies they direct, operate in sectors considered to be of strategic importance for Chinse business and national development. 14 The OECD-member states are: Australia, Austria, Belgium, Canada, Chili, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain Sweden, Switzerland, Turkey, United Kingdom, United States. 38 eight share in 1973. This trend has resulted into three crucial developments. Firstly, the Chinese economic development in comparison to the OECD-countries, stressed in the second chapter. Second, the increasing presence of China on the energy market, which will be further analyzed later on in this chapter. The third signaling factor, that is illustrated by this trend, is the low level of Chinese energy efficiency (Daojing, 2006)15. This portrays that, historically, (the lack of) domestic regulation of energy efficiency has posed a threat to the Chinese energy security.

Figure 3.1 Primary energy consumption OECD and China (% share of world consumption) 70,00% 60,30% 60,00%

50,00% 38,40% 40,00%

30,00% 21,20% 20,00% 7,80% 10,00%

0,00% 1973 2014

OECD China

Notes: Data collection and presentation by author Source: International Energy Agency (2016). Key World Energy Statistics 2016.

Energy supply security: energy import With essentially no growth in domestic oil production last year (4.18 mb/d in 2013), 59 percent of Chinese demand in 2013 came from energy imports16. China’s top ten crude oil suppliers are respectively Saudi Arabia, Angola, Oman, Russia, Iraq, Iran, Venezuela, Kazakhstan, United Arab Emirates and Kuwait. Figure 3.2 shows the share – and relative importance – of China’s major energy supplier. Taking into account that 59 percent of energy demand comes from imports, the cruciality of the energy supplying countries is shocking. As part of China's energy supply security policy, the country's NOCs are attempting to diversify supply sources in various regions. This is done through overseas investments in upstream oil projects and long-term contracts. China relies heavily on supplies from the Middle East: in 2014, the it supplied China with 3.2 mb/d, which constitutes a 52 percent

15 At the base of this issue is the fact that for a long time China has not had an adequate ministerial-level agency devoted to the country’s developments; greatly reducing its strategic capabilities (Daojing, 2006). Provincial leadership or corporate executives couldn’t be expected to foot the bill for providing an essential public good. 16 Domestic energy distribution is in accordance with their geographical location (Garver, 2006). Western provinces, like Xinjiang, are connected by pipelines to Central Asia. The Eastern provinces, close to the Chinese Sea, get their oil mainly from imported oil by sea. 39 share of its energy imports (based on EIA figures). Moreover, these figures show the strategic importance of the Middle East to the Chinese energy supply security. Historically, Iran was China's third largest source of crude imports until 2012, which was after international sanctions surpassed by Russia. Following US and European sanctions on Iranian crude oil sales resulting from disagreements on Iran's nuclear program, China reduced its average annual oil import levels from Iran to maintain diplomatic ties with the United States and Europe. Import over sea is China’s most common form of transport. This transportation route has two mayor weaknesses. The first weakness is the inevitable passing through chokepoints. Chokepoints are narrow sea lanes that facilitate a high volume of (energy) trade. For China the two most important chokepoints are the Strait of Malacca and the Strait of Hormuz. The Strait of Malacca, situated between Malaysia and the Indonesian island North Sumatra and 50 kilometers at is narrowest, accounts for approximately 80% of the Chinese crude oil imports (EIA, 2015). The Strait of Hormuz, in the Persian Gulf, is a global chokepoint where one-third of all seaborne energy trade flows through (EIA, 2015).

Figure 3.2 China's Major Oil Suppliers in 2014 (% share of total Chinese oil imports) 18 16 14 12 10 8 6 4 2 0 Saudi Arabia Angola Russia Oman Iraq Iran

Notes: Data collection and presentation by author Source: Energy Information Administration (2015). China International Analysis 2014.

3.2.2 The going out strategy and Chinese NOC’s China’s industrial success, established in 1978, was predicated on the integration of eastern China into the global economy, enhanced by the well-developed ports on China’s east coast (Garver, 2006). The west of China, far from the sea, attempted to mitigate its geographical disadvantage by setting up relations with its Central Asian neighbors, along the ancient Silk Roads (ibid). This development was accelerated when Beijing started facilitating transport-lines from Central Asia to China. The Silk Road-initiative entailed ambitious plans to broaden and deepen China’s ties to Europe, the Persian Gulf, and Africa by developing multidimensional transport corridors, interconnected logistics and

40 communications networks, and closer interstate policy coordination across Eurasia (Leverettt & Bingbing, 2016). The project is now also referred to as “going-out strategy” or “One Belt, One Road”. The projects were of such a scale that only the large Chinese SOEs were able to carry them out. The government’s push for the development of national ‘champions’ and the procurement of overseas natural resources underpins a broader agenda of economic nationalism focused on energy security, geopolitics, and competitiveness (Szamasszegi & Kyle, 2011). This development can be seen as the start of the Chinese going out strategy. To facilitate this for the SOE’s, the Chinese leadership needed to engage in energy diplomacy with resource-rich countries. The central aim was to secure long-term energy deals and contracts. This new-found foreign, or going out, policy proved to be successful. China’s economic growth; the accumulation of foreign exchange reserves, largely from its trade surpluses; and its general ‘going out’ strategy stressed that China’s investment in overseas resources projects would only increase in the future (Cheng, 2008)17. These investments are predominantly done by its NOC’s.

Chinese national oil companies (NOC’s) To understand the overseas investment strategies of the Chinese NOCs, the origins of these enterprises must be understood. In fact, CNPC, Sinopec and CNOOC share a common set of parents: the former Ministry of Petroleum Industry and the former Ministry of Chemical Industry. As described more broadly in chapter 2, the Chinese government decided to convert the productive assets of these and other ministries into state-owned enterprises (SOEs) (Jiang & Ding, 2011). Conform the overall reforms in the Chinese economy at the end of the century, the large companies were strengthened by a restructuring that left two to three dominant players in each sector (Brødsgaard, 2012). In the oil and gas industry, China National Petroleum Corporation (CNPC) and Sinopec were restructured into integrated oil companies in which upstream and downstream activities were combined. The operating areas were divided mostly on geographical base18. CNPC was the first of the Chinese NOCs to expand its operations overseas. In the early 1990s, CNPC started to invest in Sudan, Peru and Kazakhstan, despite the government’s focus at that time on

17 The strategy also increased the perception of a ‘China threat’, of which the Chinese leadership was aware. Western analyses of the new Silk Road, have tended to fall into two camps (Leverett & Bingbing, 2016). One emphasizes the domestic gains from increased cooperation, which is in accordance with the frequently outed Chinese discourse. The other camp claims that the Silk Road initiative is a reflection of the Chinese aim to respectively increase its regional hegemonic position and decrease the regional and global American position. However the Chinese government actively denies the latter perception, it continues to engage in deepening relations outside its borders by various means. 18 CNPC would continue to focus its activities on North and Northeast China, especially the Daqing oilfield, while Sinopec did so on South and East China. China National Offshore Oil Corporation (CNOOC) was to continue to concentrate on offshore oil and gas exploration and production, often in co-operation with foreign investors. Meanwhile, Sinochem continued to operate primarily within the trading sector of China’s oil and chemical products. As a consequence of this overhaul, local companies in refinery and petrochemical manufacturing as well as in domestic wholesale and retail were wiped out. 41 self-reliance and increasing domestic oil output (Jiang & Sinton, 2011)19. From 2000 to 2001, all three NOCs created subsidiaries listed on the Hong Kong stock exchange, with PetroChina (the CNPC’s listed company) raising USD 2.9 billion, Sinopec raising USD 3.5 billion, and CNOOC raising 1.3 billion. Today, they are also listed on the New York and Shanghai stock exchanges. Table 3.3 shows the key company-stats of the three major Chinese NOC’s.

Table 3.1 Overview of China’s three major national oil companies

Key Figures NOC

CNPC Sinopec CNOOC

Fortune 500 Ranking (previous 3 (4) 4 (2) 109 (72) year)

Employees 1.589.508 810.538 110.200

Revenues (in million USD) 299.271 294.344 67.799

Profits (in million USD) 7.091 3.595 4.608

Notes: Data collection and presentation by author Source: Fortune.com. Global 500

Since early 2009, CNPC, Sinopec and CNOOC, along with other Chinese SOE’s, have continuously increased their overseas investment activities (Jiang & Sinton, 2011). Based on available data, Jiang and Ding (2014) estimated that at the end of 2013, combined overseas oil and gas production by Chinese companies totaled 2.5 mb/d. Oil production accounted for 2.1 mb/d. According to EIA data (shown in Figure 2.3) this is more or less 20 percent of China’s oil consumption of that year. Among the ten Chinese companies that produce oil outside China, PetroChina, the publicly listed arm of CNPC, owns the largest amount of Chinese overseas oil and gas production (34%) at 883 000 barrels of oil per day. Together with the Sinopec group – Sinopec’s parent – (25%), CNOOC (21%) and the CNPC parent company (11%), the three mayor NOC’s accounted for 91% of Chinese overseas oil and gas production from 2011 to 2013 (Jiang & Ding, 2014).

Investment in energy Alongside importing energy from resource rich countries, China is also investing beyond its borders to enhance production in other countries and to increase its control over resources (Kong & Gallagher, 2016). According to research by Kong and Callagher (2016) the cumulative amount of China’s global

19 Amineh and Guang (2014) emphasize that by moving beyond borders, the Chinese state loses a degree of its monopoly on directing the behavior of SOEs. 42 energy investment in this century is $258 billion, including both (greenfield20) outward foreign direct investment (OFDI, from here on: FDI) and mergers and acquisitions (M&As). The globalization of energy projects also occurs through formation of joint ventures, licensing, consulting contracts, and joint research and development (R&D) (Gallagher, 2014). Kong and Callagher (2016) stress that both relatively, as well as in absolute terms, Chinese companies seem to have a preference for M&A’s. Figure 3.4 depicts the increasing engagement of China’s participation in the global FDI and M&A’s in the energy sector.

Figure 3.3 Chinese M&A's and FDI in energy in the 2000s

180.220

200.000

150.000 31.922 100.000 46.478 M&A's 50.000 14.556 FDI (greenfield) 0 2000 - 2007 2008 - 2015

FDI (greenfield) M&A's

Notes: Data collection and presentation by author Source: Kong, B., & Gallagher, K. P. (2016). The Globalization of Chinese Energy Companies: The Role of State Finance. Boston University Global Economic Governance Initiative, Boston.

Several inferences can be made from the data shown on Chinese investment in the 21st century. First, China has largely increased its foreign investment, through both M&A’s and FDI. Note that total investment in the sector quadrupled from the first seven years of the millennium to the next seven years. Furthermore, it is evident that M&A’s are preferred over FDI. The value of Chinese M&A’s is almost four times as high as that of FDI during the latter period researched here. The fact that FDI occurs almost entirely (99,24%) in emerging economies (Jiang & Ding, 2014) seems logical given the character of the investment21. On the other hand, M&A’s have pre-dominantly focused on the more industrialized countries in Asia (17,17%), Europe (23,42%) and North America (25,11%), together constituting 65,72% of the total M&A distribution (Kong & Gallagher, 2016). This approach

20 A greenfield investment is a form of foreign direct investment where a parent company builds its operations in a foreign country from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters (Investopedia, 2017). 21 FDI’s have the purpose of building activities ‘from the ground up’, something more demanded in late- industrializing countries. 43 seems to be given in by the importance of technology transfer. Lema and Lema (2012) have stressed that new ‘unconventional transfer mechanisms’ such as R&D partnerships and acquisition of foreign firms have become increasingly important for China when it comes to technology transfer.

3.3 State, the hydrocarbon Industry, and the political economy of energy in Iran In the following section, building towards the Sino-Iranian energy relation, analysis will focus on the connection between power, the oil and gas markets, and the political economy of energy and external relations in the Islamic Republic of Iran. Before analyzing this connection in detail, a comprehensive conceptualization of the Iranian state is needed. In the following section, the IRI will be conceptualized as an authoritarian-“rentier” state. This conceptualization is built upon two central characterizations of the IRI, that of an authoritarian state and that of an economy that is highly dependent on the “rents” from natural resources. The Iranian economy, in essence, should not be that dependent on its status of rentier (Mahdavy, 1970; Katouzian, 1981; Skocpol, 1982). However, the contemporary structure of the IRI and the level in which the ruling elite – as well as the GDP – is dependent on its incomes from the oil sector cause it to be a de facto rentier-state. The second characterization – that of an authoritarian state – is caused by the centrality of one person in the political system of Iran: the Supreme Leader (Rakel, 2009; Mahdavi, 2012). The next section aims to expose how these characterizations have penetrated into the veins of the Iranian society.

3.3.1 The political economy of energy in Iran The first, and most important, concept of the Iranian political system is arguably the semi-theocratic mode of rule, based on the Velayat-e fagih (Rakel, 2009). This Government of the Jurist, introduced by the post-revolutionary political elite, was based upon the constitution of 1979 and was reinforced in 1988 by adding a new dimension; the Absolute Governance of the Jurist (velayat-e motlaqah-e fagih). It ensures that the Supreme Leader has the absolute leadership over the Islamic Republic of Iran. The second concept of structuring in Iranian politics are the Republican institutions based on the Constitution of 1906. These Republican institutions, called Majiles, are the three governmental branches: the executive, the judiciary and the legislative (ibid). State-owned enterprises (SOE’s) dominate the activities in the sector, both upstream and downstream. The three key SOE’s are the National Iranian Oil Company (NIOC), National Iranian Gas Company (NIGC), and the National Petrochemical Company (NPC) (EIA, 2015). Traditionally, control over the energy sector has been closely tied to the ruling elite, with direct control in the hands of the Supreme Leader. This had consequences for the activities of IOC’s in Iran. The Iranian constitution prohibits foreign or private ownership of natural resources, and all production-sharing agreements (PSAs) are prohibited under Iranian law. However, IOC’s are able to sign so-called ‘buy-back contracts’ with the an Iranian subsidiary. The buy-back contract is similar to a service contract and requires the contractor (or IOC) to invest its own capital and expertise for development of oil and natural gas fields. After the field is developed and production has started, the

44 project's operatorship reverts back to NIOC or the relevant subsidiary. The IOC does not get equity rights to the oil and gas fields. The NIOC uses revenue from the sale of oil and gas to pay the IOC back for the capital costs. This type of contract is usually not considered very lucrative. As a result, international willingness to engage in these contracts declined, which meant a new hit for the domestic economy. Dong (2014) has outlined the theory of target-revenues22, which is similar to the RST. Shortly put, resource-rich countries use the resource-money to ‘straighten’ budget deficits. The Iranian economy has in recent years taken some mayor drawbacks – like in the beginning of the 2000s when China rolled out its Going Out policy, making Iran eager for oil- and gas exports, according to Dong (2014). This has strengthened views of Iran as rentier state. The power structures of the Iranian society, and the energy sector in particular, are an obstacle towards progression (Mahdavi, 2012). The Rouhani administration actively battled these old structures existing in the sector. The presence of IRGC-affiliated businesses, as one of the main examples, was not easily undone (Jalilvand, 2017). Consensus was found in a new petroleum law; the Iran Petroleum Contract (IPC). The IPC enables IOC’s to engage in all phases of a project, while under the buy-back contracts companies were only allowed in the exploration and development phase. IPCs cover a longer time period, normally between 20 and 25 years. Furthermore, one of the main goals of the IPC is to help facilitate knowledge- and technology transfer. Following the shift from buy-back contracts to the IPC, foreign investors from France, Germany, Japan, South Korea and the Netherlands have signed memorandums of understanding for operating petrochemical projects in Iran (Jalilvand, 2017). These developments came in the wake of the implementation of Iran's nuclear deal with world powers. Marzieh Shahdaei, the CEO of National Petrochemical Company of Iran (NPC), said that Iran's petrochemical industry was determined to enhance its installed capacity, adding: "to that end, we are looking for the attraction of foreign investment and development of investment in petrochemical industry" (Iran Petroleum, 2016). Consequently, Iran’s changed ‘energy climate’ after the JCPOA has sharpened the competition for oil projects in the country. NIOC (2017) published a tender list of 29 international oil companies, including the three Chinese majors CNPC, Sinopec and CNOOC, that are considered “qualified” to bid for upstream oil and gas projects. Officials have emphasized the increasing trend in competition for energy projects. In Iran Petroleum, National Iranian Oil Company (NIOC) deputy chief for development and engineering Gholam-Reza Manouchehri has stated that 12 memorandums of understanding have been signed with foreign companies in the petroleum industry (Iran Petroleum,

22 According to this theory, the supply-curve of oil is reversed and there are multiple equilibriums. This means that if the resource-rich country needs money to balance its budget, it will raise its oil or gas production level and seek more oil or gas export revenues. By contrast, if the resource-rich country is content with its financial situation, it will feel more secure and leave its oil and gas resources underground. The reason, then, that the investment environment for oil and gas investors has become unfriendly is that many resource-rich countries are no longer short of money. Moreover, the theory could also be explained as ‘economically-incentivized resource nationalism’. Keeping the oil or gas in the ground if possible, and sell when needed. 45

2016). He said that international tender bids are to be signed for the second phase development of Yadavaran and North Azadegan oil fields, adding that Chinese companies need to bid for these projects in order to be able to continue cooperation. "China's CNPC is willing to go ahead with the development of North Azadegan field, but Iran has announced that it has to continue within the framework of a new contract and bid for the project. The Chinese finally accepted this proposal," said Manouchehri. Regarding China's future presence in the development of Yadavaran field, he said: "Talks have been held with China's Sinopec in this regard and an international tender is to be held for the development of this field," he said. Jalilvand (2017) has published a list of upstream-contracts that were awarded to IOC’s in 2016, following the JCPOA23. The next section will analyze the relation between oil income and the state. But in anticipation of the results in that section, the findings in this section on the IPC, MOU’s, and issuance of the tender list have illustrated the changing attitude by officials in the Iranian energy sector towards international investment.

3.3.2 The Iranian hydrocarbon industry The symbol of Iran’s independence is not the magnificent Azadi Tower that marks the formal entrance to Tehran, but the rather humble stone building on the corner of Taleghani and Hafez avenues, the headquarters of the National Iranian Oil Company.

(Paasha Mahdavi in Victor et al., 2012)

In an attempt to stress the complexity of the Iranian political elite, Mahdavi (2012) states that; “the governments goals are hard to discern; lines of control are convoluted; and the ponderous institutions create many checks and balances that favor gridlock.” This characterization may be that of every single scholar, that from a distance, analyses the web of institutions and chains of command, existing in the power structure of the Islamic Republic of Iran (IRI). The Iranian state, society, and political elite are very dependent of the income from the energy market. As introduced at the start of section 3.3, studies have addressed Iran’s “resource curse,” finding that increased government revenue from oil sales has damaged the country’s economy and hindered democracy (Fardmanesh, 1991; Khajedpour, 2001). Others have discussed the features of Iran as a rentier-state that overtaxes the oil industry to sustain government expenditures (Mahdavy, 1970; Katouzian, 1981; Skocpol, 1982). The current section seeks to analyze the relations between the Iranian state and the hydrocarbon industry.

Oil production Most of Iran’s oil fields are situated in the southwest of the country. Approximately 70% of Iran’s oil reserves are situated onshore, and the remainder in offshore fields in the Persian Gulf and the Caspean

23 Lukoil, Total, Wintershall, OMV, Zarubezhneft, Taftneft, PGNiG, DNO, Pergas consortium, Schlumberger, PTTEP, Shell, Gazprom Neft, and Petronas have signed Memorandums of Understanding (MOU’s). Persia Oil and Gas has signed a IPC contract and Total has collaborated with CNPC and Petropars in a fifty-fifty agreement to exploit the South Pars phase 11. 46

Sea. One of the critical issues of the Iranian oil sector is that there’s a large share of older fields that are experiencing natural decline24 (EIA, 2015). The Iranian natural gas sector is situated mostly in the Persian Gulf, with the South Pars field as the largest gas field with 40 percent of Iran’s total gas reserves. This field is shared, across territorial waters, with Qatar25. The Iranian hydrocarbon industry has been in major disarray during the last few years. The sharpened international sanctions since 2011 have had detrimental consequences for the country’s most important industry. Production peaked at the start of this decade, as production levels grew to 4466 thousand barrels per day in 2011 (shown in Table 3.5). Following the sanctions, production dropped under the four thousand barrels per day – for the first time in the 21st century – to 3814 thousand barrels. Production levels have ever since stayed under the 4 million barrels per day (mb/d).

Figure 3.4 Oil production and consumption in Iran (in thousand b/d) 5000

4000

3000

2000

1000

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Oil production 4216 4290 4333 4361 4350 4420 4466 3814 3811 3736 3920 Oil consumption 1699 1851 1879 1954 2008 1975 1904 1915 2048 2013 1947

Notes: Data collection and presentation by author Source: BP (2016). BP Statistical Review of World Energy 2016 Full Report.

Oil and the state Iran has a history of dependency on oil prices (Mahdavy, 1970). Despite successful efforts to partly diversify the economy, the country remains in some respects heavily dependent on hydrocarbons (Mahdavi, 2012). In the 1950’s, under the rule of the Shah, Iran came in contact with US companies, other Western and Asian companies rapidly followed. From that period onwards, the government’s budget became increasingly reliant on oil revenues up to the 1979 revolution (ibid). The 1979 revolution and Iran-Iraq War caused an collapse in oil production and a consequential fall in oil

24 According to the IEA (2014), about half of Iran's production comes from oil fields that are more than 70 years old, which include the Ahwaz-Asmari, Marun, and Gachsaran fields. The NIOC has been working on offsetting declines at aging fields through the use of EOR [Enhanced Oil Recovery] techniques, mainly by reinjecting associated gas into oil wells to improve oil recovery rates. 25 The EIA states that Iran has a high success rate of natural gas exploration, which is estimated at 79 percent, compared to the world average of 30 to 35 percent. 47 dependency. However, oil dependence revived in the 1990’s (ibid). Iran’s historical fluctuating dependency on oil is depicted in Figure 3.5.

Figure 3.5 Iran’s government budget dependent on oil (1955-2008)

Source: Mahdavi, P., & Oil, M. (2012). Revolution and Theocracy: A Study on the National Iranian Oil Company (NIOC)'in Victor. DG, Hults DR and Thurber MC (eds) Oil and Governance: State-Owned Enterprises and the World Energy Supply.

According to Gray (2011), large rentier states such as Iran and Iraq, where regimes with large populations are unable to induce all of the population, must build legitimacy through other means. One of the problems for the state-oil connection for Iran, however, is that not even members of the parliament have full transparency into the oil sector (Mahdavi, 2012). This power lies predominantly with conservative officials and governing bodies (Rakel, 2009; Akhavi‐Pour & Azodanloo, 1998). One of the most distinctive aspects of Iranian politics is that of a formal and an informal political power structure. The formal political power structure consists of three core state institutions, or bonyads; the religious supervisory bodies, the Republican institutions, and the religious foundations. Mahdavi (2011) researched the connections between the Iranian political elite and the NIOC, or the oil sector and states that the bonyads have increased their presence in upstream oil and gas operation ventures. These results are presented in Figure 3.6.

Figure 3.6 Iran’s network of governing bodies and connection to the energy sector

Drawing back on Gray’s (2011) statement of large rentier states, Mahdavi (2011) states that the government uses the petrodollars to finance its own political stability by investing heavily in defense and in the state police. The IRGC was a particular beneficiary of this spending. For example, former president Mahmoud Ahmadinejad was an IRGC-member before assuming office in 2005. His rise to power as Iran’s president in 2005 saw top government posts being filled by current and former IRGC veterans (Rizvi, 2012). Furthermore, during privatization, the IRGC also took control of several confiscated factories and established the moavenat khodkafaee (headquarters of self-sufficiency) and moavenat bassazi (headquarters of reconstruction) (ibid). These two headquarters set up several companies in the agricultural, industrial, mining, transportation, road construction, import and export sectors. In contrast, to the government revenues (depicted in Table 3.2), Iran’s total GDP does not heavily rely on oil (which is shown in Figure 3.6). The dynamics of GDP-, export- and oil-numbers will be further elaborated on in the next section.

Table 3.2 Iran’s government budget dependent on oil (2000 - 2009)

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 Total government 109,407 128,860 213,148 263,375 335,694 470,990 574,989 639,109 814,235 revenue Revenue from oil 59,449 71,957 102,553 128,154 150,413 186,342 181,881 173,519 215,650 sales and taxes Oil from Oil - - 35,876 43,290 63,752 69,383 142,573 116,494 184,224 Stabilization Fund Oil as a percentage of 54% 56% 65% 65% 64% 67% 65% 54% 61% total revenue Notes: Data presentation by the author Source: Mahdavi, P., & Oil, M. (2012). Revolution and Theocracy: A Study on the National Iranian Oil Company (NIOC)'in Victor. DG, Hults DR and Thurber MC (eds) Oil and Governance: State-Owned Enterprises and the World Energy Supply.

Figure 3.7 Iran's GDP dependent on oil (2001 - 2014) (% share) 35,00%

30,00% 25,00% 20,00% 15,00%

10,00%

5,00%

0,00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % oil dependence of GDP

Notes: Data collection and presentation by the author Source: World Bank (2017). Country Data Iran

Oil exports The consequences have been hardest for the Iranian exports. While the value of its petroleum exports in 2011 added up to almost 115 billion dollars, the 2015 figures plumped to a stunning value of slightly above 27 billion in 2015. Hence, an 88 billion-decrease in national income in only 5 years, as shown in Figure 3.8. Most of the decrease came from falling exports to Europe and Asia, respectively decreasing net-export values of 663 thousand and 638 thousand barrels a day over the 2011-2014 period (Vakhashouri, 2015). As a consequence, overall exports fell from 144 billion to 77 billion dollars; a 67 billion-decrease. Notably, Iran was able to substitute a 21 billion-part of the petroleum industry by other exports than petroleum. This is also represented in the ‘petroleum dependency’- levels, as depicted in Figure 3.8. Whereas in 2012 the petroleum industry constituted more than 94 percent of the total value of Iranian exports, the dependency on oil (-products) decreased to 35 percent at the end of 2015. A percentage that is likely to increase parallel with an increasing petroleum industry and which stresses the importance of economic rents.

Figure 3.8 Iranian exports and the petroleum industry 700.000 100,00% 90,00% 600.000 80,00% 500.000 70,00%

400.000 60,00% 50,00% 300.000 40,00% 200.000 30,00% 20,00% 100.000 10,00% 0 0,00% 2011 2012 2013 2014 2015 GDP (USD) 564.459 583.164 380.348 416.490 387.611 Value total exports 144.874 107.409 91.392 85.235 77.974 Value petroleum exports 114.751 101.468 61.923 53.652 27.308 Petroleum dependency of export 79,21% 94,47% 67,76% 62,93% 35,02%

Notes: Data collection and presentation by the author Source: OPEC (2016). Annual Statistical Bulletin 2016

In light of the events and figures represented above, the Iranian willingness to agree on restrictions for its nuclear development program, in return for a slow dismantling of sanctions on its economy, may not have come as an surprise. Iranian Minister of Petroleum Bijan Zangeneh said Iran’s crude oil policy is to regain its pre-2012 production level of 4 mb/d of crude oil and its lost OPEC share of 2.5 mb/d of crude oil export (Vakhashouri, 2015). Iran has long been OPEC’s largest exporter of crude oil. In the wake of the sanctions it lost this position to neighboring country Iraq, a particularly painful event for Iran. On November 30 2016, the members of OPEC agreed to reduce their overall output by about 1.2 mb/d starting in January 2017 for a period of six months (Vakhshouri, 2017). This

was agreed upon in order to give Iran the possibility to raise oil exports to the pre-sanctions level. This generous gesture can be considered remarkable, given Iran’s poor relations with some of the OPEC- states. Looking ahead, Mahdavi (2012) distinguishes four core shortcomings of the Iranian hydrocarbon industry. First, Iran’s newest oil fields are too challenging for the NIOC to operate on its own. Second, existing oil fields have been declining at roughly 8 percent per year since 2006. Third, the technology employed in refineries has not kept pace with global best practice. And finally, despite its immense gas reserves, Iran lags far behind world leaders such as Qatar, Algeria, Indonesia, and Australia in mustering LNG technology (Mahdavi, 2011). As was found in the Literature Review, the Iranian energy sector will remain underdeveloped as the country holds the world’s largest combined reserves of oil and natural gas (13 per cent of global total) but only accounts for some 4.7 per cent (BP, 2016) of worldwide production. Considering this, together with the introduction of the IPC, as discussed in the previous section, foreign involvement in the energy sector seems inevitable. Moreover, Iranians could argue that seventeen years of Chinese NOC’s-involvement has not restored the balance. The statements by two Iranian hydrocarbon industry-officials Shahdaei and Manouchehri in the previous section (p. 46 & 47) confirm such reasoning.

3.4 The Sino-Iranian energy relations The two cornerstones of this thesis have been analyzed leading to the analysis of the relations between the two countries Within this analysis, diplomacy is the first aspect towards building a successful bilateral relation. These state-central activities facilitates trade, investment and finance. For the Sino- Iranian relation this means mostly the activities of the national oil companies, which will be the central theme in the last paragraph. Alongside cooperation on these issues, the section will also shortly outline the Sino-Iranian military cooperation.

3.4.1 Sino-Iranian diplomacy and trade The centrist government of Hassan Rouhani has welcomed China’s One Belt, One Road (OBOR) plan to revive the Silk Road. Tehran hopes the project will facilitate Sino-Iran trade and turn the country into a significant Eurasian trade hub.

(Najmeh Bozorgmehr, Financial Times, 9 May 2016)

Diplomacy The base for the close ties between China and Iran is the Chinese national humiliation narrative (Garver, 2006). That process started in 1842 with the treaty of Nanjing; which ended the first opium war (Oxford Reference, 2017). A deep-routed feeling that the existing world order, created and dominated by Western powers, is unjust and needs to be replaced by multipolar order. Furthermore, there is a mutual disapproval of the current US-hegemonic system (Garver, 2016). As outlined in the vast amount of work that John Garver has devoted to the subject, the Sino-Iranian relations have

52 always been under large scrutiny of the US26. This claim by Garver is still valid. Despite the increasing importance of energy supply security for Chinese officials, bilateral relations with Iran are by far smaller than those with the US. A key Chinese objective is multipolarity: a world in which US power is reduced and several – more or less equal – centers of power compete. These two factors – the importance of energy and multipolarity – strengthen the recently updated view formulated by Garver (2016); “Beijing’s skillful diplomacy has, in fact, effectively balanced between Tehran and Washington.” Although conclusions on the “triangular relation” between China, the US and Iran (a matter further addressed in Chapter 4) are skeptical; bilateral ties between China and Iran have become stronger over recent years. This statement is supported by findings on diplomacy, trade, investment and military cooperation. The first factor exemplifying this strengthening trend, is the number of contacts between high-level Chinese and Iranian officials. These have sharply increased in the period between 2011 and 2015. In that period Chinese and Iranian officials had 58 bilateral contacts of visits, whereas this number amounted to 29 in the five years before that. This suggests that the intensified character of international sanctions in this period has strengthened bilateral ties. China has always publicly stressed the importance of a solution on the Iranian nuclear issue, the high number of contacts indicates the Chinese role of mediator in this conflict. Figure 3.10 illustrates the Chinese activities with high-placed Iranian officials, it is notable that the period from 2012-2015 marked a manifest increase in the amount of Sino-Iranian meetings. It strengthens the ‘shielding character’ of Chinese diplomacy over Iran in difficult periods.

26 In a historical perspective, Garver (2006) notes in the concluding chapters of his China and Iran: Ancient Partners that in the pre-1979 era Iran was the one balancing between different views. The shah was hesitant as he didn’t want to provoke Russian aggression by deeper cooperation with China. The post-1979 period, on the other hand, saw a role-change: a more proactive Iran, as it hadn’t many friends left after deteriorated relations with the US, European countries and its Arab neighbors (Iraq-Iran war between 1980 and 1988). For China, its US policy became crucial in that period, which complicated closer ties with Iran. Garver (2006) stressed that; “the Middle East generally has been an area of secondary Chinese foreign policy attention, although this may well change with China’s growing energy demand.” 53

Figure 3.9 Official visits/contacts between Chinese and Iranian high-level officials 16

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Number of contacts

Notes: Data collection and presentation by author. *2017 numbers are until April. Source: Ministry of Foreign Affairs of the People’s Republic of China. Iran (Activities).

Trade Since the start of the new millennium Sino-Iranian trade has increased sharply. The average of total trade between the two countries amounted to 41,3 billion dollars per year in the 2011-2015 period, the peak of the nuclear sanctions. The results are shown in Figure 3.10. Compared to the trade in the five years before that (2006-2010) the ‘current’ trade averages had doubled. The average between 2006 and 2010 amounted to 22,7 billion dollars. The 2011-2015 level of average trade even marked a fivefold increase relatively to the average from 2003 to 2005 (data before 2003 are not publicly reported by the Chinse authorities). During Chinese President Xi Jinping ‘s visit to Iran last year, the two sides agreed to increase trade to $600bn over the next decade (Financial Times, 2016), which suggests a 50 percent increase compared the last-measured averages. The evidence drawn from the analysis of the trade numbers confirms the findings in the previous section on diplomacy figures.

Figure 3.10 Value of Sino-Iranian trade (2003 - 2015) (in 10.000 $) 3500000

3000000

2500000

2000000

1500000

1000000

500000

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Value of Iranian imports from China Value of Chinese imports from Iran

Notes: Data collection and presentation by the author Source: stats.gov.cn. Statistical Yearbooks China 2005-2016

Military cooperation The state- and company-activities in Iran are followed-up by military cooperation. Chinese-Iranian military relations date back to the Iran-Iraq war in the 1980s when China was the Islamic Republic’s main military hardware supplier (Dorsey, 2016). An upsurge of cooperation from the late 1980s through the 1990s included Chinese transfers of anti-ship cruise missiles (ASCMs) and fast-attack missile boats to Iran (Wuthnow, 2015). This level of cooperation abated in the late 1990s with the termination of Chinese assistance to Iran’s ballistic missile and nuclear programs, in part due to US- pressures. In Octorber 2010, Chinese military airplanes on their way to Turkey were allowed to make a stop on Iranian soil (Garver, 2016). This was the first time in history that foreign military airplanes were allowed to land in Iran. A further deepening of the military relation came in September 2014 when a PLA-N missile destroyer and missile frigate entered the Persian Gulf to conduct a five-day joint exercise with the IRI navy (ibid). According to the Times of Israel this was the first time PLA-N warships had entered the Persian Gulf (ibid). In anticipation of the lifting of the sanctions, China has furthermore stepped up naval cooperation with Iran (Dorsey, 2016). A visit to Iran last October by Chinese Admiral Sun Jianguo, who is widely seen as the People’s Liberation Army Navy’s (PLAN) next naval commander, produced a draft memorandum of understanding for closer cooperation in counterterrorism, cyberwarfare, and intelligence sharing (ibid). Sun’s visit followed joint Chinese- Iranian naval training exercises in 2014 in the Gulf. Furthermore, the Stockholm International Peace Research Institute also reports that China was Iran’s second-largest weapons supplier from 2002— 2009 (SIPRI, 2017). China’s proposal to grant Iran full membership of the Eurasian joint military organization, the Shanghai Cooperation Organization, is discussed in Chapter 4.

3.4.2 The activities of China’s NOC’s in Iran The value of China’s overseas investment and construction combined is approaching $1.5 trillion. That’s a figure worth featuring in the incoming Trump administration’s strategy and aggressive rhetoric concerning the PRC. On the Chinese side, will One Belt One Road be the top priority in 2017, or will it again be investment in rich countries

(Editor’s note, China Global Investment Tracker)

The biggest oil-giants, including CNPC, Sinopec and CNOOC, take the main responsibility for implementing energy policies on behalf of the Chinese government and set their own targets in terms of crude oil to be acquired overseas (Dong, 2014). In January 2001, Sinopec was the first Chinese NOC that rolled out oil activities in Iran. It acquired a 50-percent stake in the Zavareh-Kashan field from NIOC for $13 million. During the following decade, the Chinese NOC’s acquired six projects in Iran. CNPC acquired three oil projects (MIS oilfield, Block 3 of Kuhdasht and North Azadegan) plus one gas project in the same period (Block 11 of South pars). Sinopec engaged in one oil project (Yadavaran). CNOOC acquired one gas project (North Pars). On specially designed webpage China Global Investment Tracker the Heritage Foundation provides a comprehensive dataset covering the Chinese foreign direct investment.

Figure 3.11 - Chinese FDI in Iran (2005 - 2017*) (% share of investment value) Utilities Real Estate Metals 1% >0% 10%

Transport 9% Metals Transport Energy Utilities Real Estate

Energy 80%

Notes: Data collection and presentation by the author (breakdown per investment below) *2017 numbers are until May Source: China Global Investment Tracker, The Heritage Foundation

Total FDI from Chinese companies in Iran amounted to 42,61 billion dollars over the period 2006 – 2016, as shown in Table 3.3. Figure 3.11 depicts the prominence of the energy sector as target of investment. In contrast to trade and diplomacy figures, FDI doesn’t show an increasing trend when

56 comparing the 2006-2010 and 2011-2015 periods. Total FDI within the period from 2006-2010 amounted to 25.23 billion, the 2011-2015 period only summed up to 13.98 billion. It has to be noted that the former figure is so high due to an investment in the Iranian gas industry by CNOOC in September 2006, which was on its own worth 16 billion. Moreover, this was a so-called “troubled transaction27”, of which the CGIT has made a special section in their dataset. Three out of four of these transactions are done by NOC’s. In their study of Iran’s Chinese energy partners, Mark Dubowitz and Laura Grossman (2010) identified 89 instances in which the U.S. government sanctioned Chinese entities (many of which were state-owned enterprises) for transferring restricted items to Iran between 1997 and 2010 (Garver, 2011)28. Robert Einhorn, the State Department’s top official on Iran sanctions enforcement, has highlighted between $50 and $60 billion in upstream energy projects in Iran that have been terminated or put on hold because of the threat of sanctions (Dubowitz & Grossmann, 2010). Dates and years were not specified during that hearing. The sanctions have occurred under various U.S. laws: The Arms Export Control Act of 1979, Export Administraion Act of 1979, The Iran Nonprolifiration Act of 2000, The Iran/Iraq Nonproliferation Act of 1992 and Executive Orders 12938 and 13382. Three out of the four troubled transactions over the recorded period of 12 years are performed by Chinese NOC’s. Nonetheless the deviant trend, investments in the Iranian energy market take a prominent position in the Chinese FDI in the country’s economy. On a more general note, both the findings by Kong & Callagher (2016) on Chinese FDI and M&A’s, outlined in section 3.2.2, and the findings from the dataset provided by the China Global Investment Tracker conclude that Chinese FDI is mainly navigated towards developed countries. Analysis continues below with a breakdown of activities of the three mayor NOC’s in Iran.

27 These transactions include cases in which either the host country (Iran in this case) opposed foreign equity- purchases, errors were made by Chinese firms or in which the Chinese government opposed the transaction. 28 The sanctions have occurred under various U.S. laws: The Arms Export Control Act of 1979, Export Administration Act of 1979, The Iran Nonproliferation Act of 2000, The Iran/Iraq Nonproliferation Act of 1992 and Executive Orders 12938 and 13382. 57

Table 3.3 FDI by Chinese companies in Iran Date Investment Sector Contracts Year Month Chinese Investor Value in Transaction Partner Sector Subsector & Millions Investments (USD) 2005 December CITIC and CA $ 900 South Iranian Aluminum Metals Aluminum 2006 January Norinco $ 310 Tehran Railway Transport Rail 2006 July Sinopec $ 2.840 North West Shelf Partners Energy Oil 2007 October Gezhouba $ 210 Iran Water and Power Energy Hydro 2007 October China Nonferrous $ 110 Jahad Tahghighat Metals Aluminum 2007 December Sinopec $ 2.010 National Iranian Oil Energy Oil 2008 June MCC $ 200 Metals Steel 2009 January CNPC $ 1.760 National Iranian Oil Energy Oil 2010 October Sinohydro $ 1.500 Zanjan Regional Water Energy Hydro 2010 October Sinomach $ 290 Utilities 2011 April Sinomach $ 280 GEG Iron Metals Steel 2011 April China Nonferrous $ 100 National Iranian Steel Metals Steel 2011 September China Nonferrous $ 930 KALCO Metals Aliminum 2012 May Norinco $ 1.250 Tehran Urban & Suburban Rail Transport Rail 2013 January China Nonferrous $ 710 Metals Steel 2014 March CCC $ 160 Real Estate Construction 2014 May MCC $ 350 Metals Steel 2014 November Sinomach $ 320 Transport Rail 2014 December Sinosteel $ 180 Zarand Energy Coal

2015 September CCC $ 500 Transport Autos 2016 January Sinosteel $ 470 Bafgh Kasra Metals Steel 2016 January Norinco $ 330 Golbahar NTD Transport Rail 2016 February Genertec and Beijing SUP $ 1.100 Transport Rail 2016 November CNPC $ 600 Total Energy Gas Subtotal $ 17.410

Troubled Contracts & Investments 2006 September CNOOC $ 16.000 Energy Gas 2012 April Sinohydro $ 2.000 Energy Hydro 2012 July CNPC $ 4.700 Energy Gas 2014 April CNPC $ 2.500 Energy Oil

Subtotal $ 25.200

Total $ 42.610

Notes: Data collection and presentation by the author. Source: China Global Investment Tracker, The Heritage Foundation/American Enterprise Institute

Sinopec, CNPC, and CNOOC’s activities in Iran Sinopec (or China Petroleum & Chemical Corporation) was the first Chinese national oil company to set up activities in Iran. In January 2001, it acquired a 50 percent-stake in the Zavareh-Kashan (Dong, 2014). A project that was abandoned because it turned out to be futile. In 2007, Sinopec invested 2 billion dollars to get involved in the Yadaravan oil project. It targeted a production level of 185.000 b/d, the exact production levels and estimates can be found in Table 3.4. Sinopec is still developing projects in the Yadavaran field, but as stated in section 3.3.1, the introduction of the IPC increased competition for oil projects in Iran, and in the Yadavaran region in particular. Sinopec doesn’t disclose any information or specifications on foreign oil-projects in their annual reporting. The period from 2004-2009 proved to be very fertile for the Chinese NOC’s in Iran. CNPC, the largest of the three, was most productive. The company got involved in three oil projects during that period (Dong, 2014). In January 2004, it cooperated with NESCO (an Indian-based energy company) to start development of the MIS oilfield. MIS oilfield is located in the central part of a fold- and-thrust belt of the Zagros Mountain in the Persian Gulf, and has been developed for many years. In May 2004, CNPC acquired the MIS Oilfield and currently has a 75% holding in the project, while NESCO owns the remaining 25% (CNPC, 2017). In May 2005, CNPC also got involved in the Block 3 project. In May 2005, CNPC won the tender of Block 3 in Iran in the first round of overseas bidding, which is an integrated exploration and development project with a buy-back contract mode (CNPC, 2017). In June 2005, the project was formally launched when the contract officially came into force. In 2007, the Block 3 exploration project saw a daily test oil output of 1,250 barrels from the first exploration well BAB-1 (ibid). In 2009, the overall evaluation plan of Block 3 in BAB oilfield has been approved by National Iranian Oil Company and has successfully entered the evaluation period (ibid). In January 2009, the company also engaged in the North Azadegan oil field. This project started trial production in 2015. Furthermore, in 2009, CNPC signed contracts with the National Iranian Oil Company to develop Phase 11 of South Pars gas field (ibid). CNOOC is the third Chinese NOC that rolled out activities in the Iranian energy sector during the 2004-2009 period. In December 2006 it invested 1,6 billion to start activities in the North Pars gas field (Dong, 2014). According to findings by Dong, this project got suspended. The Energy Information Administration confirms in the Iran Country Analysis Brief that CNOOC is not active in Iran currently. However, the company itself states in its 2015 Annual Report that subsidiaries COOEC and CNOOC EnerTech still have overseas business in Iran (CNOOC, 2015). Furthermore the company is on the tender list, issued by the NIOC, for bidding on oil and gas projects in Iran. Table 3.4 outlines the new Iranian oil-project and its specifications, including that of the Chinese NOC’s.

Table 3.4 Iran’s new upstream oil projects

Project Recoverable Reserves Developer Production size / specifications

North Azadegan 6 to 7* CNPC Phase 1: 75.000 b/d (completed in 2016/17). Phase 2: 75.000 b/d (completed in 2019). South Azadegan 6 to 7* CNPC Produced 50.000 b/d in 2013. Phase 1 targeted 150.000 b/d and Phase 2 targets 110.000 b/d (260.000 b/d). Other estimates target a total of 300.000- 320.000 b/d) Yadavaran 3.2 Sinopec Phase 1: 85.000 b/d (completed in 2016), Phase 2: 95.000 b/d (completed in 2019-20), Phase 3: 120.000 b/d (completed after 2020). Other data state that the field already (indecently) reached 115.000 b/d) North Yaran 1.1** Persian Energy 30.000 b/d South Yaran 1.1** NIOC subsidiaries 55.000 b/d Azar NIOC subsidiaries 30.000 b/d South Pars 1.3** PEDCO 35.000 b/d Zagheh 3** 55.000 b/d Bushgan, Kuh-e- 1.1** 22.000 b/d Kaki, Kuh-e-Mond Forouzan NIOC subsidiaries 100.000 b/d Ahwaz, Aghajari, 2,7 mb/d (January 2017) Kupal, Karanj

Notes: Data collection and presentation by author (fields left blank are unknown) * Whole recoverable size of the Azadegan oil field ** ‘Oil in place’: the total estimated reserve of a field; this is a larger amount than the actual recoverable size. Reserves are always for the whole region (e.g: North and South Yaran) Source: EIA (2014). Iran Country Analysis Brief, and Vakhshouri, S (2017). Post-Vienna: Prospects for Iran’s oil production and exports. Atlantic Council Global Energy Center January 2017 Issue Brief.)

3.5 Conclusion This chapter has sought to construct a comprehensive overview of Sino-Iranian relations, and of the domestic relations towards energy. Research in the first section has shown the prominence of China’s Communist Party (CCP) in international relations. Research by Brodsgaard (2012), among others, has shown that 53 executives of China’s major – and strategically core – business groups are linked to the CCP. The influence of the party is directly connected to the Going Out strategy, with a key role for the National Oil Companies to secure supplies overseas. Diplomacy, trade, and investment, respectively constituted the core of the new multilateral foreign policy. The second section has centered around the explanation of Iran as an authoritarian rentier-state. For decades, the ruling elite has a key role in the energy sector. Research has shown that the GDP, export income, and government’s budget largely depend on income from the oil sector. The JCPOA and the introduction of the IPC are slowly changing the political economy of energy in Iran. A change that could have mayor consequences for the Chinese NOC’s. It has to be noted, in that regard, that EIA (2015) analysis has shown that Iran operates far below potential output. The third section focused on the Sino-Iranian relations. Relations in terms of diplomacy and trade largely increased since the pioneering of activities by Sinopec in 2001. Especially surrounding the years of sharpened international sanctions on the Iranian economy, suggesting China had a ‘shielding’ role. Furthermore it has shown that both trends in diplomacy, as well as in trade, have intensified in the 2011-2015 period compared to the 2006-2010 period. This has not been the case for investment, although there are clear conditions that explain this irregularity. Companies are under larger scrutiny of US laws, as outlined in the research done by Dubowitz and Grossman (2010). It has to be noted that CNOOC has engaged in a so-called ‘troubled transaction’ in the 2006-2010 period, increasing the numbers for that period. Furthermore, statements by Robert Einhorn, have stressed that the missed investments due to sanctions are worth tens of billion dollars. If this would not be counted, investment would have likely increased during the 2011-2015 period in comparison to the previous years. China and Iran have established close ties in the past sixteen years. Several domestic characteristics have positively influenced this ever-deepening relation. The compatibility of the two countries does not come as an surprise, given the domestic political structures of both countries. Both, in theory, have well established political frameworks with checks and balances that suggest plurality. In reality, however, power in both countries comes down to a small group, or political elite. Furthermore, the energy sector is considered a strategic core affair in both states, that is directly linked to the political elites. For China, energy concerns are centered around securing its energy supply. Top executives of state-owned enterprises are directly linked to the party’s leadership, illustrating the power-energy relations. In Iran, control over the hydrocarbon industry is in the hands of the NIOC. The NIOC, in turn, is controlled by the religious bodies in the Iranian political system, with a key role for Supreme Leader Khamenei. The NOC’s, finally, function as the ‘tentacles’ of the Chinese leadership overseas. Through investment, trade and technology transfer they secure their influence in

resource-rich countries, in this case Iran. It shows the success of China’s multilateral approach, as a state-led strategy, purely seen from an economic perspective. The geopolitical consequences of the Sino-Iranian relations will be discussed tin the next chapter.

Chapter 4: Geopolitical and geo-economic challenges for the Chinese energy supply security from Iran

4.1 Introduction The aim of this chapter is to research the domestic and international geopolitical and geo-economic challenges for the Chinese energy supply security from Iran. Analysis will be divided into domestic and international challenges for Sino-Iranian relations. The first section of this chapter seeks to analyze the domestic challenges for the Chinese energy supply security. The section divides challenges into three main groups. First, section 4.2.1 analyzes the challenges coming from Iranian politics, and power structures. The section seeks to outline the contrasting views of the conservative and the moderate factions in Iranian politics. Furthermore it looks at the level of democracy, and recent elections. Second, section 4.2.2 analyzes the socio-economic challenges. Unemployment, economic recovery and the position of young people and women are central here. Finally, section 4.2.3 researches the technical challenges, which in fact means the shift from the buy-back contracts to the Iran Petroleum Contract. Following from this, section 4.3 analyzes the international challenges to Chinese supply security coming from Iran. These challenges are predominantly geopolitical and geo-economic. Section 4.3.1, first analyzes the contemporary structure and developments in the Middle East and how this effects Sino-Iranian energy relations. The lack of geopolitical order, the Iran-Saudi rivalry, and the fragility of states (Arab Spring) are the main themes. Following from this, Sino-Iranian relations and the influence of ‘the West’ will be researched in section 4.3.2. ‘The West’ in this regard means the US, EU, and IOC’s. Challenges coming from these actors are diverse. Finally, the Chinese-led multilateral framework, and pre-dominantly the Shanghai Cooperation Organization will be analyzed. The central theme in this section is the increasing military cooperation between (Eur-) Asian states

4.2 Domestic challenges in Iran This section seeks to analyze the domestic challenges in Iran for cooperation with China. I’ve identified three central factors that could lead to increased scrutiny of the Sino-Iranian energy relations. First, the different views within the country’s political factions could lead to changed foreign policies. Furthermore, the May 2017 elections are analyzed here. Second, the socio-economic situation in Iran could pose a threat to China’s energy supply security. The promised recovery after the JCPOA has not (yet) reached the active population. Last, the shift towards a more open oil industry, illustrated by the IPC, could lead to challenges for the Chinese national oil companies in Iran.

4.2.1 Political (power) challenges As discussed in chapter 3, the Iranian political elite can be divided into three fractions; the conservative-, the pragmatist-, and the reformist faction. The conservative faction considers Islamic

65 jurisprudence an important constituent of the juridical system in Iran (Rakel, 2009). The pragmatist faction considers it relevant for sociocultural issues, but less relevant for economic issues. The reformist faction considers Islamic jurisprudence insufficient to address all the issues in the Iranian society. On foreign policy, the factions can generally be grouped into two ‘camps’. On the one side there’s the conservative faction considering Iran, above all, part of the umma (Islamic community) (ibid). They argue that Iran should refrain from rapprochement with the US. The ‘opposition’ is represented by the other two political factions; the pragmatists and the reformists. The combination of these two fractions is also referred to as the moderates. They argue that Iran should play an important role in the international arena. Sitting president Rouhani is an adherent of the moderates. Improved relations with Persian Gulf countries, the European Union, China, India, central Eurasia, Russia, and also the US are a result of their actions (ibid). In that respect, the JCPOA can be considered the main success of the last years. This split between the factions is also applicable to their economic bases. All factions are receive funding from the normal state sources; oil and gas revenues, taxes and fees, state enterprises and municipality income (Akhavi-Pour and Azodanloo, 1998). However, the conservative faction receives additional resources from mosques and holy shrines, religious tax, and from the religious foundations. The economic bases are depicted in Table 4.1. The conservative faction occupies, by far, the largest portion of the Iranian political elite. The faction is mostly represented in the core of the political elite, the real decision-making positions (Rakel, 2009; Akhavi-Pour and Azondanloo, 1998). Furthermore they are mostly presented in military, religious and media organizations (Akhavi-Pour and Azodanloo, 1998).

Table 4.1 Economic bases of political factions in Iran Sources Conservative Moderate faction faction Oil and gas revenues x x Taxes and fees x x State enterprises x x Municipalities' income x x

Mosques, holy shrines x

Religious tax (khums and x zakat)

Religious foundations x Source: Akhavi‐Pour, H., & Azodanloo, H. (1998). Economic bases of political factions in Iran. Critique: Journal for Critical Studies of the Middle East, 7(13), 69-82.

In 2017, presidential elections were held in Iran. Sitting president Rouhani was challenged by conservative, hard-liner, cleric Raisi, who is also one of the main candidates to succeed Supreme Leader Khamenei when time comes (New York Times, 2017). One would expect that this poses an

66 huge opportunity for change in Iran. For Iran – as non-mainstream democracy – it’s questionable whether this is true. Previous moderate-presidents such as Khatami (in 1997) were expected to change the country drastically, but results were mild. Moreover, years of moderate presidents were commonly followed by conservative-minded presidents, in which the prospects for reform decreased (see also Table 4.1 on the democracy-ratings). As outlined in the previous chapter, only a part of Iran’s political system is elected by the Iranian people. The New York Times has characterized the Islamic Republic that resulted from the revolution as “38 years of weak democracy but strong politics” (New York Times, 2017). Online metrics have tried to index countries on their ‘level of democracy’. The results of this analysis since the Shah-period, in Table 4.1, represent the figures published in the Polity IV, by the Center for Systemic Peace. Ratings range from 10 for full democracy to -10 in absolute dictatorships. Analysis Iran’s most recent score is -7. Another metric, called V-Dem, ranks countries on a scale from 0 to 1, Iran scores 0,29 on this list.

Table 4.2 Iran’s historical level of democracy since the Shah

Year Democracy Event rating* Until 1978 -10 Shah Mohammed Reza Pahlavi ruled Iran as a monarchy.

1979 0 The Islamic Revolution in Iran ended the rule of the Shah and brought Ayatollah Khameini to power in the new-found Islamic Republic of Iran (IRI). 1980 -2

1981 -4

1982 - 1996 -6

1997 - 2003 3 Reformist Khatami becomes president in 1997.

2004 - 2008 -6 Conservative and former IRGC-member Ahmadinejad assumes office in 2005. 2009 - 2015 -7 The 2009 elections saw Ahmadinejad re-elected as president. Allegations of manipulated election outcomes resulted in protests characterized as the Green Movement. Notes: Data collection and presentation by the author. Rankings range from -10 (absolute dictatorship) to 10 (democracy). Source: * Democracy ratings are based on the Polity IV composed by the Center for Systemic Peace. Elections were won by Rouhani, with 23,5 million (57%) of the 41,2 million total votes cast (Al Jazeera, 2017). Moreover, the democratic impact of these elections is questionable. Rather, the elections mean a political battle between the political factions, each with a base of support, for influence in powerful bureaucracies (New York Times, 17 May, 2017). In general, the moderate

67 faction is liberally-minded and aims for international cooperation (e.g.: with the U.S. and the European Union). The conservative faction is generally anti-Western and nationalist-minded. In principal, this would mean, the faction also distances from cooperation with China, or like former Supreme Leader Khomeini articulated it: “Not East, nor West”. However, with the death of Khomeini, this position was loosened. Although the Islamist nationalism is still championed in the conservative camp, it does no longer entail a ‘zero-tolerance’ towards the international community in general. In fact, findings of the previous chapter have shown that Chinese activities in the country are largely increasing. Furthermore, Iran is a transit-country within the Chinese One Belt One Road (Leverett & Bingbing, 2014), due to its strategic position. Given the results from the first part of this section, which stresses the prominence of the conservative faction, and the re-election of a moderate president, the inference can be drawn that there is a gap, or complex, between state and society in Iran. Moreover, if citizen-demands, represented by the moderates, were leading for the country’s decision-making, there would be an increasing shift towards ‘Western-oriented policies’. Concretely, this means that increasing influence of the moderate faction, and citizens-demands would mean increasing competition for Chinese NOC’s active in Iran. The next section analyzes the challenges from societal bases more thoroughly.

4.2.2 Socio-economic challenges Iran is a very large country that hosts 79,7 million people, of which 58,2 live in the urban parts, and 21,4 rurally (CBI, 2017). It’s population has sharply grown over the past few decades; at the start of the 1960s the country had only 22 million citizens (World Bank, 2017). The country’s active population is estimated between 26,4 (CBI, 2017) and 29,75 million people (CIA, 2017), with an unemployment rate between 12,7 and 10,7 percent in mid-2016. Young people from 15 to 29 years old represent the highest unemployment figures with numbers around 30 percent of the active population. Female- (21,8 percent) and urban- (14,4) unemployment is relatively large as well. Rouhani’s promises of economic recovery are not yet represented in the country’s economic profile yet. The country’s GDP growth numbers have varied between the 0 and 4,5 percent from 2014 to 2016 (CIA, 2017). It has to be taken in account here, that in the years before that GDP had plumped with dozens of percentage points. Higher growth-numbers are needed to recover from this economic collapse. The unemployment rate has been unstable since the start of the millennium (CBI, 2017; World Bank, 2017). Logically, the ‘sanctions-years’ have hurt the economy. Unemployment figures have had an upward trend since 2014, signs of recovery following the JCPOA in 2015 have not yet resulted in lower unemployment rates. As Rouhani was re-elected in May 2017, one of his key tasks seem to be the recovery of the country’s economy. Ongoing economic hardship increases the possibility of revolt against the regime. Consequentially, current economic relations could become a central theme of debate. This poses a challenge to Sino-Iranian cooperation, with other world-regions (e.g.: Europe, BRICS) eager to get involved in the country’s oil industry after the JCPOA. The election results of

May 2017 indicate that Iranians (along with Rouhani) tilt towards increased cooperation with Western oil firms.

4.2.3 Technical challenges Iran, and its economy, have been characterized by (resource) nationalist policies (Rakel, 2009; Jalilvand, 2017). As presented earlier in this thesis, IOC’s were never able to fully engage in the country’s oil-projects production phases. This has changed in recent years. The shift from the buy- back contract to the Iran Petroleum Contract (IPC) has enlarged the possible involvement of IOC’s in Iranian oil-projects (NIOC, 2017). The IPC is designed to attract capital and technology to Iran, to engage the Iranian state and private sectors in future energy participation with the outside world (NIOC, 2015). Since the IPC introduces a new mechanism, it will open a path for IOCs to play their roles in the oil and gas industry of Iran. It also opens a window of opportunity for smaller foreign companies to cooperate with the Iranian partners of choice to benefit from existing schemes of IPC (ibid). However, in comparison to the globally used Production Sharing Agreement (PSA), the IPC is still restrictive29. The list of companies that are ‘qualified’ to apply for Iranian oil projects contains a variety of countries, mostly Asian and European. Companies from the US are not included in the list, apart from the US-Dutch frim Schlumberger. As shown in Table 4.3, four of the twenty-nine qualified companies are from China, illustrating the increased competition for Chinese NOC’s.

29 Reza (2015) states that although the IPC is more attractive in comparison to its service contract predecessors, in order to improve them and move towards ‘pseudo-production sharing contracts’, legal obstacles should be removed. The laws should also be revised so that all foreign investors and domestic entities, particularly the Bonyads and IRGC, have equal rights and responsibilities. Moreover, at the time of public tenders, the Oil Ministry should provide all parties with an equal opportunity and equal treatment when assessing the suggested prices in tenders (for more on this see: Reza, 2015). 69

Table 4.3 Qualified IOC’s for Iranian upstream energy projects

Continent Country Company Asia China CNPC CNPW CNOOC Sinopec Japan INPEX Corporation ITOCHU Japan Petroleum Exploration Mitsubishi Corporation MITSUI South Korea Korea Gas Corporation POSCO Deawoo India ONGC VIDESH Limited Indonesia Pertamina Kuala Lumpur Petronas Thailand PTTEP Asia/Europe Russia Gazprom Lukoil Europe Spain CESPA Norway DNO Italy Eni Denmark Mearsk Austria OMV UK/France Parenco Holding Poland PGNiG Netherlands/UK Royal Dutch Shell France Total Germany Winterhall Europe/US Netherlands/US Schlumberger Latin America Argentina Plus Petrol Notes: Data collection and presentation by the author Source: NIOC (2017). Pre-Qualification Public Announcement For Iran Oil and Gas Upstream Projects Tender Rounds List of Qualified Applicants. Available from: http://en.nioc.ir/Portal/File/ShowFile.aspx?ID=0b0b8c26-c6af-45f6- 9aa3-a2995a7ac710. 4.3 International Challenges In addition to challenges coming from Iran itself, the regional and international ‘sphere’ also pose challenges to the Sino-Iranian energy relations. Analysis here will first focus on the geopolitical challenges coming from the contemporary instability in the Middle East. After that, analysis will shift towards geopolitical and geo-economic challenges coming from the United States and Europe. The Chinese-led multilateral framework of institutions, that challenges the Bretton Woods-institutions, is

70 outlined. Analysis specifically focuses on the Eurasian (military) cooperation in the Shanghai Cooperation Organization.

4.3.1 The Middle East

Lack of a Geopolitical Order in the post-Cold War era Bilgin (2014) states that critical approaches are relevant in the Middle East, while accepting also some of the ‘old security agenda’ of traditional approaches. The term “Middle East” is based on British military strategic conceptualization of the early 1900s. The Sykes-Picot agreement (1916) split up the region and brought it under British and French spheres of influence, and negated earlier made agreements between British and Arab officials (revolvy.com). A crucial – and turning – point for historians and (neo)colonialist in Euro-Arab relations. In the eyes of British and US defense planners, communist infiltration and Soviet intervention constituted the greatest threat to security in the ‘Middle East’ during the Cold War (Bilgin, 2004). From Western perspective, regional states had to take a larger role in the area, and build relations with Europe and the US. However, a ‘different Middle East’ came into existence. One in which people needed to worry for the military capabilities of neighbors, but at the same time for the conservative views of their own governments. From an ‘Arab perspective’, the labeling as ‘Middle East’ is a underplaying of its Arab character. In their perception, the ‘Arab national security’ is a key concept of regional security (Bilgin, 2014). Furthermore, the Arab world doesn’t include Turks, Kurds, Israeli’s and Iranians. The landmasses they live on, however, are included in most definitions of the ‘Middle East’. In this view, states such as Israel, Iran and Turkey, could de facto be regarded as ‘outside’ threat to the Arab national security. Another critique to these conceptualizations is that analysis is state-centered and lacks concerns voiced by societal actors (ibid). Bilgin (2004) argues that one could also speak of a ‘Muslim Middle East’ or a ‘Mediterranean Middle East’. The former is the most controversial (and currently very relevant) due to violent Islamist actors such as Islamic State, Hezbollah, Hamas or even the Islamic Republic of Iran. This conceptualization (the ‘Muslim world’, the Ummah) transcends the borders of the region, and includes Muslim communities all over the world. The Mediterranean Middle East is a conceptualization by the EU to capture the most crucial issues (according to them) in the region; energy security, regional stability and the Arab-Israel conflict. The point to be made here is that before analyzing the Middle East as a region, one has to conceptualize its meaning. Recent events have stressed that the alliances in the region effect domestic energy policy. Trump’s visit in 2017 to Saudi-Arabia and the (consequential) Qatar-boycott in that same period, after claimed statements about Iran’s position in the Middle East, have supported these aligning signals. Future energy relations may increasingly be based on bilateral- or multilateral alliances. For this thesis it means the Middle East is regarded as the geographical (or geopolitical) inclusive term. To grasp the meaning of its internal conflict, the coming sections will analyze some of the contemporary problems that the region

71 is facing and how these might influence the Chinese energy supply security from the region, and Iran in particular.

Iran-Saudi rivalry One of the issues that threat regional security is the relation between two of the main contenders for regional hegemony; this section therefore speculates on the impact of Chinese-Saudi relations on China’s energy relations with Iran. Gause (2014) states that it is perhaps the most dangerous oversimplification to place this state rivalry within the “Sunni (Saudi Arabia) versus Shia (Iran)” frame. The sectarian divide is naturally one of the most prominent issues causing conflict in the region. But Riyadh and Tehran are, before anything, playing a balance of power game for regional dominance. One of the aspects of this power struggle is the search for regional allies30, which can easily – but incorrectly – be mistaken for sectarian motivations. To explain the rivalry, Gause (2014) speaks of a Middle Eastern ‘Cold War’ that predates the Arab spring by at least half a decade. Iran’s most prominent goal is to spread its revolutionary model over the Middle East. This Iranian strategy has proved to be one of the base for conflict. One of the most clear differences between Iran and Saudi Arabia is that the former wants to ‘export’ its revolutionary ideas, and that the latter is characterized for ‘working behind the scenes’ and avoid direct challenges (Gause, 2014). The increasing influence of Iran in the region caused Saudi Arabia to conclude that it needed to take a leading role in balancing the Iranian strive for regional dominance31. The start of the Arab Spring became a (unintended) victory for Iran and a setback for the Saudis. It’s for this reason that the revolts against Bashar al-Assad in Syria became a pivotal moment for Saudi Arabia to restore the balance. On June 7th, 2017 Tehran was shocked by two terror-attacks on the Parliamant and the Shrine of Ayatollah Khomeini. Officially, the attacks have been claimed by IS, but IRGC officials accused Saudi Arabia of involvement in the attacks (Bozorgmehr & Dewan, 2017). Saudi Arabia – among other Gulf countries – closed sea-, air-, and land-borders to Qatar after alleged statements by an Qatari prince that Iran’s role in the Middle East cannot be denied. In concrete terms, alliance-building developments seem to increase. Both Iran and Saudi Arabia are important countries for Chinese

30 Hezbollah, based in Lebanon, has been an important regional – non-state – ally. Later, Iran established a strong state-to-state alliance with Syria based on their common enemies Israel and Saddam Hussein’s Iraq. Iran engaged in more state-to-state diplomacy from the 1980s to the 2000s, but due to ideological differences or violent non-state actors (i.e.: Taliban in Afghanistan) results were modest. The invasion of the U.S. in Iraq and Afghanistan created new opportunities for Iran. And so, in the mid-2000s, Iran could be considered a – or the – leading foreign influence in Lebanon, Syria, and Iraq. 31 Lebanon (Hezbollah’s increased influence) and Iraq (anti-U.S. sentiments) became lost causes for (US- befriended) Saudi influence. Other Arab countries were characterized by increasing influence of more Iran- minded movements. Palestine is dominated by a confrontation for political leadership between Fatah (Saudi minded) and Hamas (Iran minded). The conflict in Yemen centered around a sectarian divide between Houthis (Zaidi Shi’ite), tilting towards Iran, and Salafist Sunnis, which are Saudi-minded. Moreover, the years before the Arab Spring only seemed to swing the momentum of regional dominance towards Iran. At the start of the Arab Spring itself, Tunisia, Egypt and Lybia lost their American-allied regimes. With examples from Iraq and also the regime changes in these countries, Saudi Arabia’s American-connection seemed to place it in a weak spot. 72 energy supply security. The future has to show whether China can continue to increase cooperation with both states, and stay away from choosing sides in the rivalry and affect its energy supply security from these states.

State fragility in the region The unrest in Syria is easily regarded as a one-on-one domestic response of the Arab Spring. There is, logically, a very large spill-over effect from the upheaval in the other Arab countries. But it is not the only cause for the war. The lack of geopolitical order, the strive for regional dominance in the Middle East and the ongoing problem of sectarianism (mainly between Sunnis and Shi’ites) are other important regional factors (Berti & Paris, 2014). Furthermore, Middle Eastern states are projecting regional power in the civil war. These factors together have transformed the domestic Syrian conflict into a broader regional – and international – proxy war. The rebellion mirrors many of the divisions of the broader Muslim world – fragmented and at war with itself (Jenkins, 2014). These divisions are not separated by sovereign state-borders, which makes handling all these various groups within national borders more difficult. This weakness or breakdown of state authority has created domestic political vacuums into which outsiders are drawn32 (Grauss, 2014). The Arab Human Development Report 2016 has stressed that youth disempowerment is at the core of instability in the region (UNDP, 2016). The stability, however, highly varies among the countries in the Middle East. Foreign Policy and the Fund for Peace have researched the stability of states globally, and both publish an annual Fragile State Index. The indicators researched here correspond with Gause’s analysis of ‘weak states’. The results for a selection of Middle Eastern states are presented in Table 4.4.

32 In that regard, its crucial to understand the relationship between state and society and distinguish state power in the domestic political arena from power in international power rankings. A domestically weak state is one in which the government exercises little effective control over its society. Indicators are the lack to enforce its writ in substantial parts of its territory, courts that cannot enforce decisions, it cannot provide basic services to its citizens, and it does not control its borders (for more see: Grause III, 2014). 73

Table 4.4 State Fragility Indexes

Country State Fragility Index Fund for Peace* Foreign Policy** Ranking Score*** Ranking Score*** Iran 49th 85,8 47th 86,9 Iraq 10th 105,4 11th 104,7 Syria 5th 110,6 6th 110,8 Kuwait 126th 58,5 126th 58,5 Saudi Arabia 101st 71,2 97th 72,2 UAE 147th 43,7 145th 44,5 Notes: Data collection and presentation by the author. Country selection based on relevance and/or oil reserves. * Fund for Peace ranking consists of 12 indicators (Security Apparatus, Factionalized Elites, Group Grievance, Economy, Economic Inequality, Human Flight, State Legitimacy, Public Services, Human Rights, Demographics, Refugees and IDPs, and External Intervention). ** Foreign policy ranking consists of 12 indicators (Demographic Pressures, Refugees and IDPs, Group Grievances, Human Flight and Brain Drain, Uneven Economic Development, Poverty and Economic Decline, State Legitimacy, Public Services, Human Rights and Rule of Law, Security Apparatus, Factionalized Elites and External Intervention.) *** Per indicator countries can score a total of ten points (i.e.: maximum score is 120 points in total). Sources: Fund for Peace. State Fragility Index 2016 (Available at: http://fundforpeace.org/fsi/data/) Foreign Policy. State Fragility Index 2016 (Available at: http://foreignpolicy.com/fragile-states-index-2016-brexit-syria-refugee-europe- anti-migrant-boko-haram/.) The results from the Table 4.3 show large differences among the various states on their ‘state weakness’. Iran’s index score is considerably smaller than those of ‘rogue states’ as Iraq and Syria. However, it also shows that the country is far more prone to internal fragility than other resource-rich neighboring countries such as Kuwait, Saudi Arabia and the United Arab Emirates. The UNDP report findings on youth disempowerment, mentioned above, have not been studied on Iran. However, as research in section 4.2.2 has outlined, Iranian youth struggles with similar problems. Spillover-effects of regional problems seems to be more likely for Iran, than they are for competitor-resource rich countries. This realization could, at some point, become an issue for Chinese energy supply security, out of Chinese strategic considerations, or due to domestic upheaval in Iran.

4.3.2 China, Iran and the West Despite political instability, Middle Eastern countries have enormous oil and gas reserves the that will attract states and companies. Oil and security head the list of US interests in the Gulf and the two are obviously interconnected (Salameh, 2003). The effects of the US-shale revolution could have influence on its strategic dependence on Gulf oil. Still, imports from Saudi Arabia, Iraq, and Kuwait add up to almost 20% of US petroleum imports (EIA, 2017). Overall energy import dependence in the EU is slightly above 50%, mainly from Russia. In the Green Paper, issued in 2006, the European Commission stressed that decrease of energy imports from Russia was one of the core strategies. The Middle East and North Africa are the most likely regions to make up for this decrease (Remme, Blesl & Fahl, 2008). The involvement of these powers, together with Russia, India, Japan only further

74 highlights the struggle for reserves in the region. China’s dependence on import from the Middle East is 52% (EIA, 2015), so competition for oil in the region could pose a huge challenge to its energy supply in the future.

The United States and sanctions One of the key roles of US foreign policy since Woodrow Wilson, has always been the promotion of democracy, gaining more salience in the post-Cold War period (Dalacoura, 2005). The 9/11-attacks have constituted a new era of US foreign policy in a sense that the ‘War on Terror’ became one of the key pillars (ibid). Within this new approach, the Middle East was of crucial concern. It results in two key objectives for the United States in the Middle East. First, the spread of democracy and the – consequential – mitigation of anti-U.S. sentiments in the region. Second, securing the flow of natural resources from the region into the world economy. For the U.S. itself, befriended regimes in Saudi Arabia, Kuwait and Iraq and their oil are crucial for the domestic energy supply security (EIA, 2017). Authoritarian anti-Western regimes are counterproductive to the strategic interests of the US because they could influence oil supply, and are therefore the US’ main objectives for change. The most important opposing regime is that of Iran. Iran – hence, not unjustified – fears the U.S. might, at some point, will try to overthrow the Islamic regime in the country (Dalacoura, 2005). Therefore, it has used its nuclear program, it’s alliance with Hezbollah in Lebanon, Hamas in Palestina, Assad in Syria, the Shi’ite community in Iraq, and it’s efforts against Islamic State as counterbalance to U.S. efforts (Dalacoura, 2005; Hong, 2014; Jenkins, 2014). The JCPOA has taken the nuclear (for now) off the table. But the other factors have caused the paradox and complicated situation for the U.S., in which Iran, as an U.S.-enemy, is partly responsible for the region’s stability and the ongoing supply of oil. China’s main perception of the situation outlined above is twofold. First, it has the habit of not interfering in other state’s domestic affairs, whether this be nuclear development or human rights (Garver, 2011). The second is that it is commonly known that China sees US hegemonic activities in the Middle East as problematic. In that regard, China views Iran’s development into a regional power as positive, hence implying a reduction of US power in the region (Garver, 2016). The international sanctions on Iran intensified in the years between 2006 and 2012, articulated in various resolutions between resolution 1696 and 204933. 2015 marked a turning point with the JCPOA agreement. China, as permanent member of the SC, was hereby caught in a unpleasant situation. Energy supply security and massive international – mainly Western – trade relations started fighting each other. Garver (2016) states that U.S. analysts make false assumptions that China and the U.S. have common interests in the Persian Gulf. His research shows that is not the case and that leading Chinese

33 The main targets were its oil and gas industries, petrochemical export products, business with the Islamic Revolutionary Guards Corps, and later also the country’s Central Bank and thereby Iran’s connection to the international banking systems (UN, 2017). 75 journals (e,g.: Xiandai guoji guanxi, Guoji shinyou jingji, Xiya faizhou) report on the aggressive, coercive or hegemonic strategy by the U.S.. Unless the issued resolutions, analysis in Chapter 3 has shown an increasing trend in Sino-Iranian, trade and diplomacy. The main reason for this contradiction is the fact that Beijing was able to exclude national oil companies from sanctions, because of its key importance to Chinese economic growth34 (Garver, 2016). Research by Dubowitz and Grossman (2010) has identified 89 cases of Chinese involvement in Iran from 1991 until 2010 that were terminated or put down under U.S. government law. Garver argues that the main grievance of the Chinese leadership is that U.S. unilateral decisions should not apply to them. This is in line with China’s anti-hegemony outings. Dubowitz and Grossmann (2010), contradictory, state that the U.S. government sanctioned Chinese companies “without causing grievous harm to the broader U.S.-China relationship.” These two findings by Garver on the one side, and Dubowitz and Grossmann on the other, seem to mark the ‘width’ of China’s two-sided diplomacy. China has tolerated challenges to Chinese involvement in Iran to the extent that they don’t reach its core interests, the energy sector. This will directly affect Chinese energy supply security. Returning sanctions on Iran in the future are not unlikely, given the US continuing aggressive narrative towards the country. Whether this challenges the Chinese energy supply security depends on the targeted sectors.

The European Union and IOC’s Before the punitive measures sanctioned Iran at the start of the 2010s, Japanese and European companies were expanding their business in the country (van Kemmenade, 2009). Total investment of these two polities amounted to $15-20 billion (ibid). The investment of Chinese NOC’s in Iran and the international sanctions on the country caused the European involvement to stagnate. The easing of sanctions since the JCPOA, however, have significantly increased European crude oil purchases from Iran (Vakhashouri, 2017). It needs to be noted that European oil companies stay ‘leery’, and that investment in Iran still requires navigating the complex web of sanctions (ibid). Research in section 4.2.3, however, also showed that eleven European-based IOC’s are on the NIOC’s ‘qualified list’ to bid for Iranian upstream energy projects. Analysis by the Oxford Energy Institute, as already discussed in previous chapters, has found that most of these IOC’s have signed MOU’s with the NIOC to engage in oil projects. In addition, the country’s 10 per cent share of oil reserves and 18 percent share of total world gas reserves make it an almost unavoidable European energy-partner in the future. Especially, considering the ‘diversifying from Russia’-narrative going on in the EU. It seems valid to state, that a continuation of easing the sanctions on Iran directly increases the involvement of European IOC’s in the Iranian energy sector. Furthermore, an article by the National Iranian American Council has

34 Instead China’s sanctioned machinery and technology exports could not threaten economic growth. Despite Chinese efforts, FDI didn’t increase during the ‘sanction-years’, as shown in chapter 3. 76 questioned whether EU-US policy on Iran seems to be diverging (Marashi, 2017)35. The effect of possible future sanctions on Iran on European firms in the country could, hence, be mitigated.

The Chinese-led multilateral institutional framework: the SCO The introduction of Chinese-led international organizations36 started in correspondence with the Chinese One Belt One Road-multilateralism (China Monitor, 2014). China Monitor has published a report in which the alternative ‘Chinese structure’ is compared to the Western institutions, the results of this comparison are presented in Figure 4.1. The report states that: “Chinese foreign policy is not seeking to demolish or exit from current international organizations and multilateral regimes. Instead, it is constructing supplementary — in part complementary, in part competitive — channels for shaping the international order beyond Western claims to leadership” (Heilmann et al., 2014). The use of the terms supplementary, complementary, and competitive is illustrative for the debate surrounding the Chinese multilateralism37.

35 More generally, claims of diverging EU-US interests have been made. The election of EU/France-independent minded Emmanuelle Macron as new French President and the official retreat from the Paris Accords by the Trump-administration are events that have strengthened these claims. 36 Institutions and groups like the BRICS, the New Development Bank (NDB), and the Asian Infrastructure Investment Bank (AIIB) became rapidly well-known international organizations. But there was a whole range of institutions that ‘shadowed’ the established international organizations, groupings, and standards. 37 The multilateral framework has six pillars: 1) monetary policy, 2) trade and investment policy, 3) transnational infrastructure projects, 4) security policy, 5) technology (ICT), and 6) diplomatic forums (Heilmann et al., 2014). Leverett and Bingbing (2016) question whether China’s “grand strategy” is becoming more “assertive”. They state that, unlike other states, China was nog willing to subordinate to post-Cold War US power, illustrated by the strive for a multipolar world order. China’s goals in the 2015 Paris accords to increase non-fossil fuels to 20 percent of their primary energy usage (Leverett & Bingbing, 2016) highlight the Chinese willingness to engage in global agreements. Furthermore, it’s statements “that all sides should comply” (Reuters, 2017), mainly after US president Trump’s discarding statements about the accord, illustrate the changed Chinese position in global governance. 77

Figure 4.1 Parallel multilateral structure promoted by China

Source: Heilmann, S.; Rudolf, M.; Houtari, M.; Buckrow, J. (2014). China’s Shadow Foreign Policy: Parallel Structures Challenge the Established International Order. China Monitor. Merics Mercator Institute for China Studies. One of the Chinese-led institutions that might have the greatest geopolitical implications is the Shanghai Cooperation Organization (SCO)38. Currently, the SCO has eight member states: Kazakhstan, Kirgizia, India, China, Russia, Pakistan, Tajikistan and Uzbekistan. Iran, among others, is an observer state in the organization. On June 8th, the latest SCO meeting inaugurated India and Pakistan as new full members of the organization. Upon completion of this of this process, the SCO will represent 40 percent of humanity and 20 percent of global GDP (The Indian Express, 2017). It means all member countries will conduct joint military exercise actions39. Observers have called the SCO the counterweight to the US (Heilmann et al., 2014; Akbarzadeh, 2015). Other sources have stressed that SCO summits were used as a platform to request the withdrawal of US troops from Central Asia and Afghanistan (Akbarzadeh, 2015). Notably, US-

38 The SCO’s main goals are: strengthening mutual trust and neighborliness among the member states; promoting their effective cooperation in politics, trade, the economy, research, technology and culture, as well as in education, energy, transport, tourism, environmental protection, and other areas; making joint efforts to maintain and ensure peace, security and stability in the region; and moving towards the establishment of a democratic, fair and rational new international political and economic order (SCO, 2017). 39 In that light, the full membership of India is curious. India’s relations with Pakistan have been tensioned, mostly over the Kashmir region. India accuses Pakistan of supporting the militants in insurgencies in that region, a claim dismissed by Pakistan (Sputnik, 2017). India and China also have a border dispute over several small regions which resulted from the Sino-Indian war in 1962 (ibid). The head of the Eurasian department of the Indian ministry of External Affairs stated that he hoped differences could be overcome. "That [differences with China and Pakistan] is not a concern for us in the sense that yes, we are part of many bodies and not everyone who is member of that body agrees on everything that is discussed there. SCO is not different to that. We are going there with open mind." 78 military dominance is still unchallenged, according to data from the Stockholm International Peace Research Institute, as can be seen in Table 4.6. These numbers exclude military spending of all US- allied NATO members. Noting that, one can state that no world-alliance is able to challenge the Western military capabilities now or in the nearby future.

Table 4.5 Military spending US, SCO members, and Iran (in millions)

Country Military spending in 2016 US $611186

China $215176 Russia $69245 India $55923 Pakistan $10063

Uzbekistan - Kyrgizia $206 Kazachstan $1102 Tajikistan $96* SCO members total $351811

Iran $12685 Notes: Data collection and presentation by the author. * Tajikistan data is from 2015. Source: SIPRI (2017). SIPRI Military Expenditure Database. Available from: https://www.sipri.org/databases/milex. Moreover, despite internal differences, there seems a gradual process of (Eur-) Asian alignment, partly through multilateral institutions such as the SCO. From Chinese perspective, it is another tool to strengthen ties with its resource-rich neighbors and enhance its energy supply security. US-relations with those countries diverge. Proxy wars, like those in the Syria and Iraq at the moment, where US and Russia support opposing sides on the battlefield, have increasingly occurred in recent years. The SCO has not yet cooperatively engaged in military conflict. However, joint exercises have been performed. The organization’s members relate, however, in anti-US (Russia and observer state Iran) or anti-hegemonic (China, India and Russia) sentiments. In the most recent summit on June 8th, China has proposed the full membership of Iran to the SCO (Blanchard, 2017). Drawing back to the debate over the ‘character’ of the Chinese multilateral institutions, one can state that this action classifies most likely in the competitive-department. The increasing level of energy- and security- cooperation could have mayor geopolitical influences on future US-Sino-Iranian relations.

4.4 Conclusion Analysis in this chapter has sought to analyze the geopolitical and geo-economic challenges that the Sino-Iranian energy relations face. Notably, reasoning on these challenges involves a high ‘speculative

79 character’, despite thorough analysis in this chapter and in this thesis as a whole. Therefore, I specify direct challenges, that have the potential to influence the relations in the near future, or already did so (e.g.: the involvement of IOC’s in the Iranian hydrocarbon industry), and more indirect challenges that predominantly originate in ‘spillover effects’ (e.g.: the instability in the Middle East). The structure of the chapter was based on two pillars: domestic challenges coming from Iran and international geopolitical- and geo-economic challenges. The first domestic challenge to the Chinese energy security from Iran originates in the country’s politics. The ruling elite is divided into the conservatives and moderates. Conservatives bodies, alongside Chinese NOC’s have a crucial position in the country’s political economy and energy sector. Recent elections have renewed the mandate for current moderate President Rouhani, who has a more favorable position vis-à-vis Western countries than the conservatives have. In that regard, the challenge for Chinese economic supply security is centered around increasing Western influence – and activities in the oil sector. The second domestic challenges is socio-economic. Unemployment is high among young people and women. Analysis in the chapter has shown ‘youth disempowerment’ is at the base of instability in the Middle East. Iran therefore seems more receptive for spillover effects from instable neighboring countries, which constitutes the socio-economic challenge. Lastly, the change from the buy-back contract to the IPC poses a technical challenge. Like the political challenge, outlined above, this more IOC-friendly contract increases the possibility of more Western (and other Asian) activity in the hydrocarbon industry. In effect, energy supply through Chinese NOC’s could diminish. The combination of the first and last challenge, relying on political economic change, constitutes a direct challenge to the Sino-Iranian energy security. Due to the tight grip on society, the socio-economic challenge is regarded as indirect. Challenges in the international realm are various. The main challenge in the Middle East is China’s partnership with both Saudi Arabia and Iran. Analysis has shown that the two countries are increasingly opposing each other in regional developments (e.g.: Syrian Civil War, Arab Spring, Qatar boycott). It could be argued that China at some point could be faced with difficulties in maintaining relations with both states. However, until today, this remains a very indirect challenge. US influence challenges the Sino-Iranian energy relations predominantly through potential sanctions. Iran is the US’ main opponent in the region. Although the process of lifting international sanctions has been ongoing for a while, diplomatic relations have been far from restored. China’s willingness to comply to US-demands has a clear boundary; its energy supply security. Future developments in this “triangular relation” remain geopolitically tensioned. US actions concerning Iran can therefore be regarded as direct challenges to China’s energy supply security from Iran. Geo-economic challenges originating from Europe are related to the changed ‘energy climate’ after the introduction of the IPC. The Green Paper, issued by the European Commission, explicitly states that the EU needs to geographically diversify its energy imports from Russia. North Africa and the Middle East are the most logical substitutes. The fact that eleven European-based companies are

80 now ‘qualified’ to bid for Iranian upstream energy projects – against four Chinese firms – stresses the increased competition. This is a direct European geo-economic challenge to China’s energy supply security coming from Iran. Finally, the increasing cooperation through multilateral institutions could develop into increased geopolitical tension. Whereas the investment banks also have Western member-states, the SCO is an exclusive Eurasian organization. Regional powers as Russia, India, China, and Pakistan collaborate in the SCO. China has been the main advocate of Iranian full membership of the organization. Membership of the SCO, labeled as the NATO-counterpart (China Monitor, 2014), also entails joint military exercises. An Iranian membership in this organization could greatly enhance geopolitical tension, not only with the US, but also with states as Saudi Arabia and Israel, that would regard military cooperation between Russia, China, India, Pakistan and Iran as threatening. However, this is not yet reality and therefore regarded in this thesis as an indirect challenge.

Chapter 5: Conclusions

This thesis has provided a comprehensive study of the energy relations between China and Iran. The research has aimed to provide insight into the construction of energy relations. It has aimed to outline how economic growth in China resulted in mechanisms to secure scarce resources abroad. Energy supply security is at the heart of Chinese foreign policy. Increasing energy needs and the connection of bilateral relations with a large variety of countries have eventually resulted in the current multilateral approach. The Going Out strategy has empowered the Chinese NOC’s to expand into large conglomerates and engage in activities abroad. Close ties between the NOC’s and the Communist Party have strengthened the companies and enabled the party’s leadership to sustain domestic growth. Taking Iran as a case study has given analysis in the thesis the opportunity (and obligation) to not only discuss the specifics of energy relations between China and Iran, but also to engage in connected developments in the field of international relations. Contemporary developments in the Middle East are of crucial importance to China’s energy supply security, as a large share of its energy imports come from the region. Furthermore, the region is of crucial importance to other powers such as the United States and the European Union. It has made analysis an interesting and complex matter. The unique defining elements of Iran as a state and as an energy supplying partner for China have made the approaches used in this study difficult to generalize. The rift between opposing factions, the salience of the nuclear issue, the buy- back contract and Iran Petroleum Contract, all of these are crucial for analysis and unique for Iran. However, the research performed in this thesis has resulted in an integrated analysis of the Sino-Iranian energy relations. On the one hand analysis has looked at the elements that have facilitated strengthening ties between the China and Iran. On the other hand, research has looked into factors that could impede the relations between the two countries. The main question that this thesis has tried to answer was therefore; What are the challenges and opportunities of energy supply from Iran for the Chinese energy security?

In order to provide an answer to this question, the following sub-questions were formulated: 1. Who are the actors in China and Iran that contribute to the Sino-Iranian energy relations? 2. What efforts have been made on both sides in order to render the energy relations between both countries? 3. What are the geopolitical challenges for the Sino-Iranian energy relation? 4. How do the JCPOA, the introduction of the IPC and the election of Rouhani, all taken place in recent years, affect the Sino-Iranian energy relations?

To answer these questions the thesis has relied on the theory of Critical Geopolitics. The theoretical framework that was used for analysis, centered around the core concepts of this theory. It combines elements from International Relations with International Political Economy. Energy scarcity and

83 energy security are at the heart of analysis. These concepts have resulted in lateral pressures that induced the Chinese leadership to look abroad for scarce resources and comfort domestic state- society-market relations. The Going Out strategy, its operationalization in the One Belt One Road initiative, and the transnationalization of national oil companies, for the subject under study in this thesis in particular, can be conceptualized by means of this theory as power projection by the Chinese state. For both China and Iran, the ‘authoritarian state-led society’ as outlined by Amineh and Guang (2014) explains some core elements in state structures. Power in both countries is concentrated with a few governing bodies and persons. And furthermore Critical Geopolitics, as defined by Amineh and Guang (2014) assumes that in authoritarian states, the state class or political class of the state has greater control over the executive, legislative and judicial branches of government, which is has proven to be true for both countries. Furthermore, such states are characterized by opposing views between rival factions and interests in political economy. The latter statement is a representation of current Iranian politics surrounding the energy sector. On the one hand, there is the conservative faction, favoring national Islamic policies. These conservatives are led by the Supreme Leader and are furthermore scattered over the rest of the ruling elite and governing bodies. On the other hand, there is the moderate faction, that has pressured to introduce the IPC, and generally favors the entrance of IOC’s. Furthermore, the concepts that were lend from the Rentier State Theory have been applied in the analysis on the Iranian hydrocarbon industry. Iran’s investment in the IRGC and military are a reflection of Gray’s (2011) analysis that rentier states have to finance their stability through heavy investment in military and domestic police.

In China, the CCP has a ‘spider-in-the-web’-position in the countries ruling elite. It has direct involvement in the most important branches of government, including the energy sector. Former Chinese ministries were transformed into the current state-owned enterprises. It is mostly due to this development that these SOE’s, or the NOC’s in case of this thesis, didn’t lose their strong ties to the government. The SASAC and COD, which is a CCP-department are the most important governing bodies to that administrate the sector. The CCP’s nomenklatura list contains party officials which are appointed to crucial executive positions in the SOE’s in general, among which the NOC’s. The most important NOC’s are CNPC, CNOOC, and Sinopec, that have – or in cases of CNOOC had – activities in the Iranian hydrocarbon industry since 2001. For Iran, state-energy relations are more scattered. First, the Supreme Leader and the bodies under his control (the Guardian Council and the Expediency Council), have direct influence which is institutionalized through the Velayat-e fagih. On a more general level, conservative-affiliated officials have crucial positions towards the energy sector. One of the main examples of state bodies in the energy sector is the IRGC. After international companies left the sector due to the sanctions on Iran,

84 the IRGC managed to gain a strong foothold into the domestic hydrocarbon industry. The NIOC is the most important actor on the operational level. The reason that the governing elites have close ties to the energy sector is due to its strategic importance. For China, energy supply security is crucial to sustain domestic growth. For Iran, the state income is highly dependent on the oil sector.

China’s involvement in Iran intensified when NOC’s entered the Iranian hydrocarbon industry in 2001. Despite international sanctions on Iran, Sino-Iranian relations have strengthened ever since. In fact, there has been contra-international sanctions ‘shielding’-approach from the Chinese side. The most prominent finding in this thesis, in that regard, is that China strengthened ties with Iran, in times when the country was subject to heavy international sanctions. In the period between 2011 and 2015 official state visits doubled in comparison to the five years before that. Furthermore, average trade numbers significantly increased over the same periods. An increase from 22 billion to 41 billion in average trade numbers between the two countries. Chinese President Xi Jinping has stated recently that both countries agreed that trade for the next years would increase to $600 billion, another 50 percent increase. Investment also constituted a mayor pillar of Sino-Iranian energy relations. Data recovered from the China Global Investment Tracker has shown that the share of investment from Chinese companies in Iran between 2001 and 2017, has happened for 80 percent in the energy sector. In contrast to trade and diplomacy, investment did suffer from the international sanctions on Iran. Finally, China has been the main advocate for Iranian full membership of the SCO. The Eurasian organization that promotes regional stability and engages in common military exercises.

The results from ‘liberal policies’ such as the IPC and JCPOA have not resulted in economic recovery in Iran. Annual economic growth is still below 5%, which is relatively low in comparison to the enormous collapse of the Iranian economy in 2012. Research has shown that international cooperation is needed to fully utilize the Iranian hydrocarbon industry. Not only due to Mahdavi’s (2012) findings on the state of oil fields and technology in the Iranian energy sector, but also stated by Iranian officials in the sector. Memoranda of Understanding’s that were signed since 2016 have not yet resulted in mayor oil-export increases. The second Rouhani-administration will likely put pressure on these results. Therefore, it remains to be seen how increased cooperation with Europe and Asian IOC’s will affect Sino-Iranian energy relations.

The challenges that were outlined in the fourth chapter of this thesis can be grouped in several ways. The structure of the chapter has outlined these challenges based on the geographical scope; first domestic, after that regional, and finally global. Findings in the chapter have shown that challenges have a high level of variance in probability to happen. The economic hardship of the last years has resulted in lateral pressure in Iranian state-society relations. The 2017 election has renewed President Rouhani’s mandate to bring economic growth to

Iran. These election results, and domestic pressures, have resulted in the connection of two main domestic challenges to the Chinese energy supply security coming from Iran. Political and technical challenges have enhanced the process of ‘mild liberalization’ of the Iranian political economy. The IPC has been its main result. These domestic challenges have been supplemented with international geo-economic challenges from European (and Asian) based IOC’s. The contract has attracted a large group of IOC’s to start bidding for Iranian upstream energy projects. The combination of these challenges should be of concern to the Chinese NOC’s. Findings on the effect of youth disempowerment on state instability in the whole Middle East, by the UNDP (2016), have mirrored contemporary socio-economic problems in Iran. Unemployment among women and young people in Iran is very high. According to analysis this has been at the core of instability in neighboring countries, and could have spill-over effects to Iran. Another challenge originating in Iran’s Middle East affairs, is its rivalry with Saudi Arabia. Chinese energy supply security could be endangered when diplomatic relations towards one, or both states come under pressure. Increasing signals of alignment, mainly through sectarian divides and US pressures, could pressure China into ‘choosing sides’. Given the importance of both countries to China’s energy supply security, this could have major effects. US influence on China’s activities have reduced after the JCPOA. However, the threat of returning sanctions or other US-led punitive measures has not faded. US-narratives on Iran are still highly skeptical. The effect of the US on Sino-Iranian energy relations will therefore remain a geopolitical challenges for the foreseeable future.

Based on the findings in the thesis, the hypotheses that were formulated in the research design can now be tested: Hypothesis I. The state-society-market relations in Iran and China have facilitated ever-deepening energy relations in the last 17 years. China and Iran are compatible countries in several ways. First, based on the findings on China and Iran, both draw near to the ideal type state-society-market complexes of the authoritarian system. Power is in the hand of a governing elite. Iran inhabits a ‘opposing’ faction that wants to steer economic policies in a different direction. But the conservative faction, has since the death of Ayatollah Khomeini, loosened the “Not East, Nor West”-principle, and has focused on cooperation with China. Analysis of Iranian ‘rentierism’ in the third chapter has highlighted the dependence of government budget on oil income, which was around 60% in recent years. Relatively, the GDP dependence on oil income is low (15%). These skewed dependence numbers stress the importance of continued energy-deals for the Iranian leadership. It enables them to finance their stability. The Chinese NOC’s are of crucial importance to expand across borders and operationalize the One Belt One Road initiative. The NOC’s have had an important role in the ever increasing energy relations in the period between 2001 and 2017. Hypothesis 1 is therefore accepted.

Hypothesis II. Chinese efforts in diplomacy, trade and investment have ‘shielded’ Iran from the increased international sanctions on the country. Chapter 3 has analyzed the diplomatic, trade, and investment ties between China and Iran. Both diplomatic, trade, and investment ties have intensified over the 2001-2017 period. Special analysis in this thesis has been directed to the 2011-2015 period, in comparison to the time period between 2006 and 2011. Iran came under increased sanctions in the years following 2011, until in 2015 the JCPOA eased relations. For these time periods, investment and diplomatic ties, for the measures formulated in this thesis, have almost doubled. Investment from Chinese companies in Iran, on the contrary, was negatively influenced by the sanctions. Furthermore, analysis on the Iranian GDP has showed that it dropped by more than 100 billion dollars in 2012 (mainly due to sanctions). Average trade numbers between the China and Iran increased with an average of 20 billion when comparing the 2006-2010 and 20110-2015 periods. Based on Chinese intentions, Hypothesis II is accepted. In contrast, purely looking at economic output, Hypothesis II should be rejected. Hypothesis III. Sino-Iranian energy relations will continue to enlarge after 2017, despite the domestic and international geopolitical and geo-economic challenges. The period between 2001 and 2017 has resulted in a vast increase in diplomatic, trade, investment, and military relations between China and Iran. China’s depends on country’s as Iran to secure its energy supply. Vice versa, Iran, and the country’s governing elite in particular, is dependent on oil income to finance its stability. As has been stressed in the discussion on sub-question 4, the mayor – concrete – challenges might come from IOC involvement and the Iran-Saudi rivalry. These two events, among others, have the potential to decrease Sino-Iranian energy relations. However, the scrutiny of this relation is not a new phenomenon, and the ‘shielding’ character by China during recent years has signaled its intentions concerning Iran. Furthermore, the SCO-involvement of Iran has highlighted its strategic objectives. Its therefore that I accept Hypothesis III.

Recommendations This thesis has tried to provide an inclusive and comprehensive study of the Sino-Iranian energy relations. This has been done by focusing on ruling/governing elites, power structures, diplomacy, trade, investment, oil companies, Iranian energy upstream projects and military relations. It has resulted in a broad analysis of ties between China and Iran. Despite this broad scope of analysis, several subjects that are related to the Sino-Iranian energy relations are still understudied, and are also not fully addressed in the present thesis. First, the consequences of disruptions in chokepoints and pipelines is understudied. Analysis on the Strait of Malacca and the Strait of Hormuz, in relation to Sino-Iranian energy relations should be studied more thoroughly. Furthermore, the effect of global oil prices on Sino-Iranian energy relations is still understudied and could form a niche for further research. Research by Farzanegan and Markwardt (2009); Farzanegan and Parvari (2014); Ghandi & Lin (2014); Goldthau & Witte (2009); Keating,

Kuzemko, Belyi & Goldthau, (2012); Matutinovic (2009) on oil contracts, oil prices and global energy governance could form a strong base for research on this subject. Research on individual connections between the CCP, COD, SASAC, and NOC’s, elaborating on research by Brødsgaard (2011), for example, is needed as well. Finally, as events discussed in this thesis are rapidly evolving, ongoing analysis of the topics that were researched within the scope of this thesis should be performed as well.

Bibliography

Primary sources BP (2016). BP Statistical Review of World Energy 2016 Full Report. Available from: http://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp- statistical-review-of-world-energy-2016-full-report.pdf. Last visited at: 7 May 2017 China Global Investment Tracker (2017). The Heritage Foundation / American Enterprise Institute. Available at: https://www.aei.org/china-global-investment-tracker/. Last visited from: 7 May 2017. CNOOC Limited (2015). Annual Report 2015. Available from: http://www.cnoocltd.com/jcms/jcms_files/jcms1/web5/site/attach/0/160406064725055112. Last visited at 7 May 7, 2017. CNPC (2015). Petrochina Company Limited Annual Report 2015. Available from: http://www.petrochina.com.cn/ptr/rdxx/201604/460f9d4dcf424cde80235f817afdc5c7/files/b1 0bec77a3934acab3bffb07d84f089d.pdf. Last visited at: 7 May 7, 2017. Energy Invormation Administration (2015). China International Analysis 2014. Available from: https://www.eia.gov/beta/international/analysis.cfm?iso=CHN. Last visited at 6 may 2017. Energy Information Administration (2015). Iran Country Analysis Brief 2014. Available from: https://www.eia.gov/beta/international/analysis.cfm?iso=IRN. Last visited at: 6 may 2017. International Energy Agency (2016). Key World Energy Statistics 2016. Available from: https://www.iea.org/publications/freepublications/publication/KeyWorld2016.pdf. Last visited at: 7 May 2017. Ministry of Foreign Affairs of the People’s Republic of China. Iran (Activities). Available from: http://www.fmprc.gov.cn/mfa_eng/wjb_663304/zzjg_663340/xybfs_663590/gjlb_663594/281 8_663626/2820_663630/. Last visited at: 7 May 2017. OPEC (2016). Annual Statistical Bulletin 2016. Available from: http://www.opec.org/opec_web/en/publications/202.htm. Last visited at 7 May 2017. Sinopec (2015). Annual Report 2015. Available from: http://www.sinopec.com/listco/en/Resource/Pdf/2016032918C.pdf. Last visited at: 7 may 2017. World Bank (2017). Country Data Iran. Availablet from: http://data.worldbank.org/country/iran- islamic-rep. Last visited at: 7 may 2017. Internet Sources Blanchard, B. (2017). China says Iran membership of Shanghai security bloc to be discussed at summit. Reuters. Available from: https://www.reuters.com/article/us-china-sco-iran- idUSKBN18W0CD. Last visited on June 14, 2017. Bozorgmehr, N. (2016). First freight trains from China arrive in Tehran. Financial Times. Available from: https://www.ft.com/content/e964a78e-0bd8-11e6-9456-444ab5211a2f . Last visited at 6 May 2017. Bozorgmehr, S. (2017). Iran’s Revolutionairy Guards blame Saudis for Tehran attacks. CNN. Available from: http://edition.cnn.com/2017/06/07/middleeast/iran-parliament- shooting/index.html. Last visited on 14 June 2017.

CNPC.com. CNPC in Iran. Available from: http://www.cnpc.com.cn/en/Iran/country_index.shtml . Last visisted at: 6 may 2017. Fischer, M. (2017). How Iran Became an Undemocratic Democracy. newyorktimes.com. Available at: https://www.nytimes.com/2017/05/17/world/middleeast/iran-presidential-election- democracy.html. Last visited at 21 May 2017. Foreingpolicy.com (2017). State Fragiligy Index 2016. Available at: http://foreignpolicy.com/fragile- states-index-2016-brexit-syria-refugee-europe-anti-migrant-boko-haram/. Last visited at 21 May 2017. Fortune.com. Global 500. Available from: http://fortune.com/global500/. Last visited at: 7 May 2017. Fundforpeace.org (2017). State Fragility Index 2016. Available at: : http://fundforpeace.org/fsi/data/. Last visited at: 21 May 2017. Investopedia.com. Green Field Investment. Available from: http://www.investopedia.com/terms/g/greenfield.asp. Last visited on 9 April 2017 Iranpetroleum.ir. Iran Petroleum Monthly Archive. Available at: http://www.iranpetroleum.ir/pages/archive. Last visited at: 6 may 2017. Lee, J. (2017). China says committed to Paris accord as Trump undoes U.S. climate policy. Reuters.com. Available from: http://www.reuters.com/article/us-usa-trump-energy-china- idUSKBN1700RU. Last visited on 26 May 2017. Lendon, B. Luu, C. Han, S. (2017). North Korea: China stomping on ‘red line’ in relations. CNN.com Available at: http://edition.cnn.com/2017/05/04/asia/north-korea-china-relations-red-line/. Last visited on: 9 May 9, 2017. Marashi, R. (2017). Will Europe and America Diverge on Iran?. National Iranian American Council. Available at: https://www.niacouncil.org/will-europe-america-diverge-iran/. Last visited on 14 June 2017. Oxfordreference.com. Nanjing, Treaty of (1842). A Dictionairy of World History. Available from: http://www.oxfordreference.com/view/10.1093/oi/authority.20110803100222302. Last visited on 20 June 2017 Revolvy.com. Sykes-Picot agreement. Available at: https://www.revolvy.com/topic/Sykes- Picot%20Agreement&item_type=topic. Last visited at 19 May 2017. Sanger, D.E., 2011. The larger game in the Middle East: Iran, The New York Times, 2 April. Available from: http://www.nytimes.com/2011/04/03/weekinreview/03sanger.html?pagewanted=all. Last visited at Sectsco.org (2017). About SCO. Available from: http://eng.sectsco.org/about_sco/. Last visited on 27 May 2017. SIPRI (2017). SIPRI Military Expenditure Database. Available from: https://www.sipri.org/databases/milex. Last visited on 27 May 2017. Stats.gov.cn. Statistical Yearbook of China 2005 – 2015. Available from: http://www.stats.gov.cn/tjsj/ndsj/2015/indexeh.htm. Last visited at: 7 May 2017. SWIFT.com. (2017). Compliance: SWIFT and sanctions. Available at: https://www.swift.com/about- us/legal/compliance/swift-and-sanctions. Last visited at 9 May 2017.

Systemicpeace.org (2017). Polity IV: Regime Authority Characteristics and Transitions Datasets. Available at: http://www.systemicpeace.org/inscrdata.html. Last visited at 21 May 2017. Tait, R., 2011. Is Iran still center of Middle East’s ‘Great Game’? Radio Free Europe, 14April. Available from: http://www.rferl.org/content/is_iran_still_center_of_mideast_great_game/3556457.html Tisdall, S., 2011a. Iran helping syrian regime crack down on protestors, say diplomats, The Guardian, 9 May. Available from: http://www.guardian.co.uk/world/2011/may/08/iran-helping-syrian- regimeprotesters. Academic articles and book chapters Abbaszadeh, P., Maleki, A., Alipour, M., & Maman, Y. K. (2013). Iran's oil development scenarios by 2025. Energy policy, 56, 612-622. Abdolmohammadi, P., & Cama, G. (2015). Iran as a peculiar hybrid regime: Structure and dynamics of the Islamic Republic. British Journal of Middle Eastern Studies, 42(4), 558-578. Akbarzadeh, S. (2015). Iran and the Shanghai Cooperation Organization: Ideology and Realpolitik in Iranian Foreign Policy. Australian Journal of International Affairs, 69(1), 88-103. Akhavi‐Pour, H., & Azodanloo, H. (1998). Economic bases of political factions in Iran. Critique: Journal for Critical Studies of the Middle East, 7(13), 69-82. Aliboni, R. (2011). The international dimension of the Arab Spring. The International Spectator, 46(4), 5-9. Amineh, M. P. (1999). Die globale kapitalistische Expansion und Iran: eine Studie der iranischen politischen Ökonomie (1500-1980) (Vol. 62). LIT Verlag Münster. Amineh, M. P. (2009). Iran: social revolt and prospects for change (part. 1 and 2). Amineh, M. P., & Eisenstadt, S. N. (2007). The Iranian revolution: The multiple contexts of the Iranian revolution. Perspectives on Global Development and Technology, 6(1), 129-157. Amineh, M. P., & Yang, G. (Eds.). (2012). Secure oil and alternative energy: the geopolitics of energy paths of China and the European Union. Brill. Amineh, M. P., & Yang, G. (2014). Introduction. Perspectives on Global Development and Technology, 13(5-6), 495-535. Baer, R., 2009. The devil we know: dealing with the Iranian superpower. New York: Three Rivers Press. Berti, B., & Paris, J. (2014). Beyond sectarianism: Geopolitics, fragmentation, and the Syrian civil war. Strategic Assessment, 16(4), 21-34. Bijian, Z. (2005). China's" peaceful rise" to great-power status. Foreign Affairs, 18-24. Bilgin, P. (2004). Whose ‘Middle East’? Geopolitical inventions and practices of security. International Relations, 18(1), 25-41. Brødsgaard, K. E. (2012). Politics and business group formation in China: the Party in control?. The China Quarterly, 211, 624-648. Brumberg, D., Ahram, A. (2007) The National Oil Company in Iranian Politics. James Baker III Institute for Public Policy of Rice University.

Chehabi, H. E. (2001). The political regime of the Islamic Republic of Iran in comparative perspective. Government and Opposition, 36(1), 48-70. Chen, W. S. (2010). China's oil strategy: “Going Out” to Iran. Asian Politics & Policy, 2(1), 39-54. Cheng, J. Y. (2008). A Chinese view of China's energy security. Journal of Contemporary China, 17(55), 297-317. Cordesman, A. H., Gold, B., & Coughlin-Schulte, C. (2014). Iran: Sanctions, Energy, Arms Control, and Regime Change. Rowman & Littlefield.Cunningham, E. A. (2015). The State and the Firm: China’s Energy Governance in Context. Global Economic Governance Initiative Working Paper, 1-44. Cox, R. W. (1992). Multilateralism and world order. Review of International Studies, 18(02), 161-180. Cunningham, E. (2007). China’s Energy Governance: Perception and Reality. MIT Center for International Studies Audit of the Conventional Wisdom, 07-04. Daojiong, Z. (2006). China's energy security: Domestic and international issues. Survival, 48(1), 179- 190. Dorraj, M., & Currier, C. L. (2008). Lubricated with oil: Iran-China relations in a changing world. Middle East Policy, 15(2), 66. Downs, E. (2010). Chapter 4: Who’s Afraid of China’s Oil Companies? In: Pascual, C. and Elkind, J., eds. (2010), Energy Security: Economics, Politics, Strategies and Implications: pp.73 – 102. Brookings Institution Press: Washington D.C. Dreger, C., & Rahmani, T. (2016). The impact of oil revenues on the Iranian economy and the Gulf states. OPEC Energy Review, 40(1), 36-49. Dubowitz, M., & Grossman, L. (2010). Iran's Chinese Energy Partners: Companies Eligible for Investigation Under US Sanctions Law. FDD Press. Fardmanesh, M. (1991). Dutch Disease Economics and Oil Syndrome: An Empirical Study. World Development 19 (6): 711-717. Farzanegan, M. R. (2011). Oil revenue shocks and government spending behavior in Iran. Energy Economics, 33(6), 1055-1069. Farzanegan, M. R., & Parvari, M. R. (2014). Iranian-Oil-Free Zone and international oil prices. Energy Economics, 45, 364-372. Feng, Z., Zhang, S. B., & Gao, Y. (2014). On oil investment and production: A comparison of production sharing contracts and buyback contracts. Energy Economics, 42, 395-402. Filiu, J. P. (2011). Apocalypse in Islam. Univ of California Press. Gallagher, K. S. (2014). The globalization of clean energy technology: Lessons from China. MIT press. Garver, J. W. (2006). China and Iran: Ancient partners in a post-imperial world. University of Washington Press. Garver, J. W. (2011). Is China playing a dual game in Iran?. The Washington Quarterly, 34(1), 75-88. Garver, J. (2013). China–Iran relations: Cautious friendship with America’s nemesis. China Report, 49(1), 69-88.

Garver, J. (2016). China and Iran: An Emerging Partnership Post-Sanctions. Middle East Institue, 02- 08. Garver, J., Leverett, F., & Leverett, H. M. (2009). Moving (Slightly) Closer to Iran: China’s Shifting Calculus for Managing Its “Persian Gulf Dilemma. Edwin O. Reischauer Center for East Asian Studies, Asia-Pacific Policy Papers Series, October, 9-10. Gause III, F. G. (2014). Saudi-Iranian rapprochement. The incentives and the obstacles. Visions of Gulf Security. POMEPS Studies, (25). Ghandi, A., & Lin Lawell, C. Y. C. (2013). On the rate of return and risk factors to international oil companies in Iran's buy-back service contracts. Ghandi, A., & Lawell, C. Y. C. L. (2017). On the rate of return and risk factors to international oil companies in Iran's buy-back service contracts. Energy Policy, 103, 16-29. Harold, S. W., & Nader, A. (2012). China and Iran: economic, political, and military relations. Rand Corporation. Harris, J. (2009). Statist globalization in China, Russia and the Gulf states. Perspectives on Global Development and Technology, 8(2), 139-163. Houweling, H., & Amineh, M. P. (2003). I. The Geopolitics of Power Projection in US Foreign Policy: From Colonization to Globalization. Perspectives on Global Development and Technology, 2(3), 339-389. Hsieh, J., Ziemba, R., & Dubowitz, M. (2014). Iran’s Economy, Out of the Red, Slowly Growing. Foundation for Defense of Democracies & Roubini Global Economics, 86. Hsieh, J., Ziemba, R., & Dubowitz, M. (2015). Iran’s Economy Will Slow But Continue To Grow Under Cheaper Oil and Current Sanctions. Roubini Global Economics and Foundation for Defense of Democracies. Ikenberr, G. J. (2014). The illusion of geopolitics: The enduring power of the liberal order. Foreign Affairs, 93, 80. Jacques, M. (2009). When China rules the world: The end of the western world and the birth of a new global order. Penguin. Jalilvand, D.R. (2017). Iranian Energy: a Comeback with Hurdles. Oxford Institure of Energy Studies. James, M. D. (2016). China & the Middle East: Tilting Towards Iran?. (Dorsey) Jenkins, B. M. (2014). The Dynamics of Syria's Civil War. RAND Cooperation Jiang, J., & Sinton, J. (2011). Overseas investments by Chinese national oil companies. Jiang, J., & Ding, C. (2014). Update on Overseas Investments by China’s National Oil Companies. Achievements and Challenges since 2011. International Energy Agency. Juneau, T. (2014). Iran under Rouhani: Still alone in the world. Middle East Policy, 21(4), 92-104. Jiang, B., ‘China National Petroleum Corporation (CNPC): a balancing act between enterprise and government’, in: Victor, D., Hults, D., Thurber M., Oil and governance. State-owned enterprise and the world energy supply, (2012). Katouzian, H. 1981. The Political Economy of Modern Iran: Depotism and Pseudo-Modernism. 1926- 1979. New York University Press.

Keynoush, B. (2012). Iran after Ahmadinejad. Survival, 54(3), 127-146. Khajehpour, B. (2001). Iran’s Economy: 20 Years after the Islamic Revolution. In: Iran at a Crossroads, ed. John L. Esposito and R.K. Ramazani, 93-122. New York: Palgrave. Keating, M. F., Kuzemko, C., Belyi, A. V., & Goldthau, A. (2012). Introduction: Bringing energy into international political economy. In Dynamics of energy governance in Europe and Russia (pp. 1-19). Palgrave Macmillan UK. Kong, B., & Gallagher, K. P. (2016). The Globalization of Chinese Energy Companies: The Role of State Finance. Boston University Global Economic Governance Initiative, Boston. Kraus, J. (2014). Iranian Revolutionary Guard Corps and Their Influence on the Iranian Government, Military and Economy. The International Annual Scientific Session Strategies XXI, 1, 171.Lawrence, S. V. (2013). China's Political Institutions and Leaders in Charts. Congressional Research Service. Lawrence, S. V. (2013). China's Political Institutions and Leaders in Charts. Congressional Research Service. Lee, H., & Shalmon, D. A. (2007). Searching for Oil China's Initiatives in the Middle East. Environment: Science and Policy for Sustainable Development, 49(5), 8-21. Lema, R., & Lema, A. (2012). Technology transfer? The rise of China and India in green technology sectors. Innovation and Development, 2(1), 23-44. Leverett, F., & Bingbing, W. (2017). The New Silk Road and China’s Evolving Grand Strategy. The China Journal, 77(1), 110-132. Liu, D. (2014). China’s Resource Demand and Market Opportunities in the Middle East: Policies and Operations in Iran and Iraq. Perspectives on Global Development and Technology, 13(5-6), 564-587. Looney, R. E. (Ed.). (2012). Handbook of oil politics. Routledge. Mahdavi, P., & Oil, M. (2012). Revolution and Theocracy: A Study on the National Iranian Oil Company (NIOC)'in Victor. DG, Hults DR and Thurber MC (eds) Oil and Governance: State- Owned Enterprises and the World Energy Supply. Mahdavy, H. 1970. The Patterns and Problems of Economic Development in Rentier States: The Case of Iran. In: Studies in Economic History of the Middle East, ed. M.A. Cook, 428-467. Oxford University Press. Mead, W. R. (2014). The return of geopolitics: The revenge of the revisionist powers. Foreign Affairs, 93, 69. Monshipouri, M., & Dorraj, M. (2013). Iran's foreign policy: a shifting strategic landscape. Middle East Policy, 20(4), 133-147. Morrison, W. M. (2011). China-US trade issues. Current Politics and Economics of Northern and Western Asia, 20(3), 409. Moshiri, S. (2015). The effects of the energy price reform on households consumption in Iran. Energy Policy, 79, 177-188. Nakajima, S., 1982. China’s present energy problems: present and future. The Developing Economies 20 (4), 472–498.

Parchami, A. (2012). The ‘Arab Spring’: the view from Tehran. Contemporary Politics, 18(1), 35-52. Peng, S., Chen,L., 2011. Reforming China: Major Events (1978–1991). Enrich Professional Publishing (S) Private Limited, Singapore. Qin, J. Y. (2004). WTO regulation of subsidies to state-owned enterprises (SOEs)–A critical appraisal of the China Accession Protocol. Journal of International Economic Law, 7(4), 863-919. Rakel, E. P. (2009). Power, Islam and Political Elite in Iran: From Khomeini to Ahmadijejad. Rakel, E. P. (2009). The Political Elite in the Islamic Republic of Iran: From Khomeini to Ahmadinejad. Comparative Studies of South Asia, Africa and the Middle East, 29(1), 105-125. Rakel, E. P., ‘The energy policy of the Islamic Republic of Iran towards the European Union and China’, in: Amineh, M., Guang, Y., The globalization of energy: China and the European Union (2010). Remme, U., Blesl, M., & Fahl, U. (2008). Future European gas supply in the resource triangle of the Former Soviet Union, the Middle East and Northern Africa. Energy Policy, 36(5), 1622- 1641.Rosenberg E., Vakhshouri, S. (2015). Iran’s Economic Reintegration. Center for a New American Security. Sadeghhi-Boroujerdi, E., 2011. Islamic democracy and its limits: the Iranian experience since 1979. British Journal of Middle Eastern Studies, 38 (2), 267–282. Scissors, D. (2013). China’s Global Investment Rises: The US Should Focus on Competition. Heritage Foundation Backgrounder, 2757. Shambaugh, D. (2011). Coping with a conflicted China. The Washington Quarterly, 34(1), 7-27. Shaofeng, C. (2011). Has China's foreign energy quest enhanced its energy security?. The China Quarterly, 207, 600-625. Singh, M. (2016). One Year After the Nuclear Deal: Is Iran Moderating?. Skocpol, T. 1982. Rentier State and Shi’a Islam in the Iranian Revolution. Theory and Society 11 (3): 265-283. Stevens, P. (2012). The ‘shale gas revolution’: Developments and changes. Chatham House, 2-3. Sun, X., Li, J., Wang, Y., & Clark, W. W. (2014). China's Sovereign Wealth Fund Investments in overseas energy: The energy security perspective. Energy Policy, 65, 654-661. Sullivan, L. R. (2011). Historical dictionary of the Chinese communist party. Scarecrow Press. Szamosszegi, A., & Kyle, C. (2011). An analysis of state-owned enterprises and state capitalism in China (p. 89). Capital Trade, Incorporated for US-China Economic and Security Review Commission. Vakhshouri, S (2015). Iran’s Energy Policy After the Nuclear Deal. Atlantic Council Global Energy Center June 2014 Report. Vakhshouri, S (2017). Post-Vienna: Prospects for Iran’s oil production and exports. Atlantic Council Global Energy Center January 2017 Issue Brief. Vogel, E.F., 2011. Deng Xiaoping and the Transformation of China. Harvard University Press, Cambridge.

Walter, C., & Howie, F. (2012). Red capitalism: the fragile financial foundation of China's extraordinary rise. John Wiley & Sons. Wuthnow, J. (2015). China-Iran Military Relations at a Crossroads. China Brief, 15. Wuthnow, J. (2017). A Brave New World for Chinese Joint Operations. Journal of Strategic Studies, 1-27. Xing, L., & Clark, W. W. (2010). Energy Concern in China's Policy-Making Calculations: From Self- reliance, Market-dependence to Green Energy. Yao, L., & Chang, Y. (2015). Shaping China's energy security: The impact of domestic reforms. Energy Policy, 77, 131-139. Zimmerman, T. (2015). The New Silk Roads: China, the US, and the Future of Central Asia. NYU Center on International Cooperation http://cic. nyu. edu/sites/default/files/zimmer- man_new_silk_road_final_2. pdf.