Each step China takes in overseas energy exploration is difficult-there is huge resistance. This occurred when China National Offshore Oil Corp. (CNOOC) announced plans to explore for gas and oil in Iran. The strange thing is that the strongest opposition arose not in the two concerned nations but from a third party that is thousands of miles away, the United States.

On December 22, 2006, a CNOOC official indicated that the company and the National Iranian Oil Company signed a memorandum of understanding on the development of the North Pars gas field, which contains an estimated 80 trillion cubic feet of natural gas, according to the document.

The project involves an investment of more than $16 billion, of which $11 billion will be spent on the downstream refining and processing segment and the rest on the upstream exploring segment. According to the preliminary agreement, the gas from the field will be liquefied and divided equally between the two companies.

The project is expected to take eight years to bear fruit, and under the terms of a planned agreement signed as early as October, the National Iranian Oil Company offered CNOOC a 25-year gas supply from the North Pars field.

That caused an immediate and strong reaction in U.S. political circles. Tom Lantos, a California Democrat who is chairman of the House International Relations Committee, said his panel will "closely examine" the deal to see if it triggers a 1996 law, the Iran and Libya Sanctions Act, which prohibits foreign firms that invest more than $10 million in Iran's energy sector from raising capital in American financial markets. Lantos said the committee would scrutinize whether the sanctions apply, because the U.S. law aims at starving Iran of funding for terrorism and nuclear weapons.

Lantos warned that if China follows through with a signed agreement, there is a high possibility of harsh punishment.

Undoubtedly, China has the obligation to follow United Nations regulations, but it has no obligation to follow U.S. laws. America threatens to sanction China in accordance with its domestic law, which means that the United States is placing its domestic law above international law.

There is no necessity to fear the Iran and Libya Sanctions Act. This law has prompted a strong protest from European countries that have close energy ties with Iran since the day it was passed. It has never been used; thus French newspapers have dubbed it a "scarecrow." The second year after the law was passed, the French oil company Total, in association with Russian and Malaysian companies, signed a contract with Iran valued at $2 billion, which was considered a public challenge to the law. French former Prime Minister Lionel Jospin even criticized the United States on public occasions, saying that U.S. law applies only in America, not in France. On this issue, the European Union has supported Total.

Assessing risk

In any case, the China-Iran agreement is still worth thinking about. Overseas enterprises should pay attention to the risk of intervention from a third party. If one party in a trade relationship between two countries is considered a real or potential enemy by a third country whose political or economic power exceeds that of the two trade partners, then the risk of third party intervention exists. If this third party is a trade opponent of either of those partners, then the risk is even higher.

Currently, Chinese enterprises mainly face two kinds of third-party intervention risk. The first is direct sanctions by the third party government, especially the United States. If an overseas enterprise trades with countries regarded as "dangerous" by Washington, for example, Iran, Sudan and North Korea, the risk will lead to losses like being excluded from the U.S. market, being incapable of obtaining financing there, and having high-ranking managers of the enterprise barred from the United States. The other risk is indirect sanctions by the third party. Under pressure or cajoling by the third party, the host country has to break its promise. The oil pipeline project between China and Russia once was disrupted by Japan.

As a country whose comprehensive power is rising quickly, China has caused dread among some factions in a conservative country like the United States. Now, its overseas energy exploration raises the risk of third-party intervention. First, gas and oil belong to a strategic industry. As international gas and oil exploration always involves political elements, political influence will be inevitable in China's overseas energy projects.

Second, just like other economic entities that have experienced rapid industrialization, China's energy consumption has risen rapidly together with its economic growth. Since 1993, China has been an oil importer. In the future, China's energy supply will rely more on imports. Therefore, China will be regarded as a competitor by traditional energy-importing countries.

Third, Chinese enterprises' overseas energy exploration will cause disputes with Western energy giants, which used to dominate international gas and oil exploration. Those giants have a strong motivation to persuade their governments and their host countries' governments to limit their Chinese competitors. Political tussles among big countries also will influence China's overseas energy exploration.

Fourth, since it has no advantage when competing with Western energy enterprises in countries that maintain close relations with Western countries, especially America, China has to turn to countries that have less close ties with the United States, such as Iran, Venezuela and Sudan.

Fifth, big Chinese oil enterprises have gone public in the U.S. stock market, which gives some U.S. elements the opportunity to press China through the financial market. The U.S. Government actually required Chinese enterprises to promise not to become involved in oil exploration projects in countries that America specified, mainly Middle Eastern countries, which was the precondition for the Chinese enterprises' listing on the U.S. stock market. After CNOOC's project with Iran was revealed, some U.S. sectors suggested that U.S. companies that hold CNOOC shares should stop investing in the company.

Under these circumstances, China has experienced third-party intervention during its overseas energy exploration. And CNOOC is not the first Chinese oil enterprise to have encountered U.S. intervention when cooperating with Iran. As early as 2004, the Iranian Government invited international public bidding on the exploration of 16 Iranian oil fields. At that time, the U.S Embassy in China actually requested Chinese enterprises to drop their bidding. Therefore, China's overseas oil strategy has to consider international political elements. Russia influences the oil sector in Central Asia; the United States is getting control of oil exploration in Africa; and both countries have a say in the field of energy exploration along the Caspian Sea.

International political conflicts bring both challenges and opportunities to China's overseas oil exploration. For example, as Tehran's relations with Washington become more strained, the former is offering better conditions to foreign oil enterprises, which has greatly decreased foreign investors' financial risks.

It is practical for the United States to realize that China's increasing demand for energy is natural and inevitable, and part of the reason for the increase is attributable to EU and U.S. exporters. Thus, strengthening energy strategy negotiations is more practical than intervention.

In last December, U.S. Treasury Secretary Henry Paulson published an article entitled, "A Broad Dialogue With China," stating that working with China's leaders to help it achieve more environmentally and economically sound growth and constructive engagement with the global energy market is among the topics of its Strategic Economic Dialogue with China. Such a rational attitude is a good start.

The author is a researcher with the Chinese Academy of International Trade and Economic cooperation of the Ministry of Commerce