China, Iran and the Nexen Deal

The $15.1-billion bid for Nexen Inc. by the China National Offshore Oil Corporation (CNOOC) has triggered a debate in Canada about how far to go in allowing China’s national oil companies (NOCs) to buy into the strategic oil and gas sector. The deal has also aroused some concern in the United States, where Nexen has a tiny proportion of its assets and a few critics have raised the issue of the national security implications of allowing the Chinese to gain an operating toehold in the energy sector.

But those risks and the anti-Chinese rhetoric that has seeped into the presidential campaign obscure an important strategic benefit to the current and any future administration: allowing China’s NOCs into North America provides them with a powerful incentive to stop doing business with Iran.

How to handle Iran’s opaque nuclear program is one of the most urgent and vexing questions facing Washington and its allies. The Obama administration sees squeezing the Iranian regime through sanctions as the best hope for curbing Tehran’s nuclear ambitions short of military strikes. The stakes are also high for Ottawa, which has taken an increasingly hard line on the issue.

Over the past decade, the US-led international sanctions regime against Iran has tightened. The United States has gradually ratcheted up the pressure through the implementation of increasingly robust sanctions on Iran’s energy, shipping and financial industries. These sanctions prescribe penalties for entities that engage in activities such as investing in Iran’s oil industry, selling gasoline to Iran or doing business with the Central Bank of Iran, the clearing house for oil payments. Australia, Canada, Japan, Norway and South Korea and the European Union have also implemented curbs on investment in Iran. The EU has also imposed an oil embargo against Iran and banned insurers and reinsurers from covering tankers carrying Iranian crude.

Meanwhile, China has emerged as the linchpin of the international sanctions regime against Iran. Although Beijing has no desire to see Iran acquire a nuclear weapons capability, it regards sanctions, especially unilateral ones, as an ineffective tool. Consequently, China’s NOCs are the only major foreign investors left in the Iranian oil patch. They remain occasional sellers of gasoline to Iran and large buyers of Iranian crude oil.

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