China, the world’s secondlargest oil consumer, is strengthening its relationship with the Middle East.

However, as Persian Gulf countries look for new partners and markets, the United States is at odds with Iran over its nuclear program and its traditional ties with Saudi Arabia are eroding. China is likely to be cautious over the geopolitical complexity of these issues when seeking its energy supplies.

China is now one of a handful of countries actively investing in Iran’s oil and gas sector. It is bucking a trend that has many multinationals, including Norway’s StatoilHydro and France’s Total, pulling out of Tehran. As the world’s fourthlargest oil exporter, Iran has become a key provider for China, and is now its thirdbiggest supplier after Saudi Arabia and Angola, providing China with 12.6 percent of its oil needs in 2007.

One of China’s most controversial investments in Iran is Sinopec’s $2 billion contract to develop the huge Yadavaran oilfield, with recoverable reserves of at least 3 billion barrels. Critics say the deal undermines diplomatic efforts to tackle such issues as nuclear proliferation. However, it seems China’s energy thirst now takes priority. The deal has highlighted tensions between the U.S. and China over Iran, with U.S. officials warning that the agreement would undermine international efforts to press Iran on its nuclear program.

Another problematic involvement is CNOOC’s agreement, valued at $16 billion, to develop, and buy from the vast North Pars integrated LNG project. The company has stopped short of signing a commercial contract with Iran.

These deals have occurred despite China’s stated support for a third round of U.N. sanctions against Iran over its nuclear program. The U.N. Security Council has issued two resolutions against Iran's nuclear program since last December, but each failed to persuade the Islamic Republic to stop its uranium enrichment work.

China’s latest support for U.N. sanctions indicates it doesn’t want Iran to set a precedent for a military firststrike doctrine over nuclear issues. Clearly, if Iran obtains a nuclear weapon, it would be a destabilizing force in the region that is the source of much of China's oil.

China is now trying to get Iran’s energy supply in a roundabout way. CNPC is in talks with Oman to build or use its existing energy infrastructure to import Iran’s LNG. In so doing, CNPC hopes to dilute possible U.S. criticism. CNPC is also eager to secure a contract to develop the second phase of Iran’s Kish gas field. It is doing an independent study to build a pipeline to move the Kish gas to Oman’s Qalhat LNG plant for liquefaction, and then ship the fuel to China.

It does seem China knows when to stop. Political uncertainties over Iran's nuclear program have halted CNPC's plan for further exploration at an oil discovery in Iran. Last year, the company drilled the first wildcat well at Kuhdasht in Block 3, which uncovered 100 million tons of oil reserves. In 2005, CNPC won the right to explore the block in western Iran through an open tender launched by the National Iranian Oil Company two years earlier.

While Iran is important, China’s real interest in the region is Saudi Arabia, its single biggest supplier. In 2007, China imported about 530,000 barrels per day from Saudi Arabia, accounting for about 16 percent of the total. Foreign minister Prince Saud alFaisal has indicated that his country would like to reduce its dependence on U.S.dominated security arrangements. In 2006, King Abdullah chose China for his first official trip abroad and described it as a “truly friendly country.” Oil minister Ali alNaimi has repeatedly said that the kingdom will supply China whatever volume of oil it wants.

AlNaimi has also told Chinese officials that more Saudis would be sent to China to study Chinese, so they could better communicate during oil and gas deals. And Chinese oil companies are angling for more access to the Saudi oil and gas sector. In 2004, Sinopec signed a $300 million gas exploration license for nearly 40,000 square kilometers in the Empty Quarter deserts of the Rub alKhali Basin, edging out U.S. companies interested in the area. This followed a similar Sinopec deal with Aramco to develop natural gas near the eastern Ghawar field over 10 years.

Saudi Arabia is taking a Chinese wife, said Charles W. Freeman Jr., a former U.S. ambassador to Saudi Arabia who has extensive diplomatic experience in China. The Saudis are not divorcing us. In Islam you can have more than one wife and they can manage that.

Iraq’s huge oil reserves have also proved tempting to China. Iraqi oil minister Hussein alShahristani visited Beijing in late August to revive an oil contract signed during Saddam Hussein’s regime. In 1997, CNPC bought a 50 percent stake in the alAhdab oil field for $1.2 billion. The field has an estimated reserve of 1.3 billion barrels, but development was delayed due to U.S. sanctions. And last April, Iraq shortlisted CNPC, Sinopec, CNOOC, and Sinochem Corporation to participate in the country’s oil and gas exploration and development.

The ChinaMiddle East relations are twoway, with China opening its doors to Middle East investment. Saudi Aramco now has a 25 percent stake in a 240,000 bbl/d refinery in China’s southern Fujian Province. Saudi Basic Industries Corporation, one of the world’s largest petrochemical firms, has signed a $1.7 billion agreement with Sinopec to build a 1 million ton ethylene derivatives complex in China’s northern city of Tianjin.

PetroChina and Kuwait Petroleum Corporation have agreed to build a $5 billion refining venture in the southern Guangdong Province to increase fuel supplies as energy demand increases. The refinery will be able to process as much as 300,000 bbl/d of crude.

These deals are in accord with the Chinese government’s policy to secure reliable energy resources. And they come as domestic production is falling in the eastern fields due to rapidly depleting oil reserves amid soaring domestic demand. By 2030, the country’s oil consumption will more than double from the current level to about 15 million bbl/d. Of that, domestic production will account for only about 4 million barrels, which means heavier reliance on imports. By 2020, China is expected to import 70 percent of its oil needs, compared with less than 50 percent today. Seventy percent of the imports will come from the Middle East, according to the International Energy Agency.

In other words, while America’s rhetoric regarding Saudi Arabia continues to inflame tensions between the two, officials in Beijing are basking in warm relations in Riyadh.