OREANDA-NEWS. September 16, 2013. As China's oil imports climb to new highs, it appears to be walking a fine line to avoid U.S. penalties for dealing with Iran.

Despite its shift to evade sanctions, China remains dependent on Middle East oil, posing potential problems if the Syrian crisis spreads.

In July, China cut its crude oil imports from Iran to some 397,000 barrels per day, putting it close to an unofficial target for reductions this year, Reuters reported.

The volume was down 12.6 percent from a year earlier, although average daily imports of 420,000 barrels for the first seven months fell by a smaller margin of 3.5 percent.

China is reportedly aiming to cut its Iranian imports by 5-10 percent this year from 2012 levels, which would fall in the range of 394,000-416,000 barrels per day.

The unspoken goal is to qualify for an exemption from U.S. penalties on buyers of Iranian oil under sanctions imposed in 2012 to block financing for Tehran's suspected nuclear arms program.

Sanction terms

Under terms of the sanctions, Chinese oil companies could be barred from dealing with U.S. banks if they continue transactions with Iran, unless they receive a six-month waiver for "significant reductions" in crude imports.

Since the law came into force, the State Department has already granted China three waivers, most recently in June.

China's customs figures suggest that the sanctions have had a major effect on the country's buying patterns overtime.

Average daily deliveries from Iran in July were down 28.7 from average levels in 2011, when China imported over 557,000 barrels per day.

Over the same period, China's crude imports from all sources have grown by 21 percent, or about 1 million barrels per day. Iran has fallen from third to sixth place on the list of China's suppliers.

In recent months, China has been offsetting its shortfalls from Iran by dramatically boosting imports from Iraq.

In July alone, Iraqi oil supplies to China soared 135 percent from a year before, while deliveries so far this year rose 47 percent.

Striking a balance

Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research, said China has been trying to balance international pressures and financial interests.

"I think they are very conscious of getting that waiver and not having this become another part of the agenda of friction with the United States," Herberg said.

The shift to Iraqi oil offers China a short-term solution to the threat of sanctions.

"It's not hard to imagine the government would tell the companies to cut those imports for a few months -- you need to make this switch, it's a comparable crude, go ahead and move from the one to the other," said Herberg.

But the switch may not do China much good if conflict spreads in the Middle East.

This year, China has relied on Persian Gulf countries for over half its oil imports, which average 5.6 million barrels per day.

The country is increasingly import dependent with domestic production of some 4.1 million barrels per day, according to National Development and Reform Commission (NDRC) data.

China has been reluctant to stop Iranian imports altogether because it is believed to have negotiated discount deals.

"They're constantly haggling with them over prices," Herberg said. "The Chinese figure they can get a special low price because the Iranians are under pressure."

The situation could soon change as a result of even tougher sanctions passed by U.S. House lawmakers in July on a 400-20 vote.

The Iran Nuclear Prevention Act authored by Representatives Ed Royce, a California Republican, and Eliot Engel, Democrat of New York, could make it harder to get waivers since it seeks to cut Iranian crude exports by an additional 1 million barrels per day within a year.

"The economic and political pressure on Tehran must be ratcheted up," said Royce, who chairs the House Foreign Relations Committee, in a statement.

Stronger steps

The measure could come before the Senate as soon as this month. On August 3, 76 senators wrote to President Barack Obama in support of stronger steps to curb Iran's nuclear program.

"Until we see a significant slowdown of Iran's nuclear activities, we believe our nation must toughen sanctions and reinforce the credibility of our option to use military force at the same time as we fully explore a diplomatic solution to our dispute with Iran," said the senators, according to the Associated Press.

It is unclear what effect the new sanctions would have on China's oil imports and energy costs, but the country already appears to be seeking ways around the restrictions.

On Aug. 21, The Wall Street Journal reported that China has partially sidestepped the existing sanctions on crude by buying nearly USD 500 million of Iranian fuel oil in the first half of the year instead.

China imported less than USD 1 million worth of Iranian fuel oil in 2012, the Journal said.

According to Chinese customs data, imports in the first seven months of this year jumped over 75,000 percent.

Representative Royce has already called on Congress to close the loophole by broadening the definition of oil in sanctions legislation.

"This is widely recognized as a loophole that you can drive an Iranian oil tanker through," said Mark Dubowitz, executive director at the Washington-based Foundation for Defense of Democracies, according to the Journal.

Customs data shows that China has reduced its fuel oil imports from other suppliers including Singapore, South Korea and Malaysia while increasing purchases from Iran.