By WAYNE MA in Beijing and COLUM MURPHY in Shanghai
China's imports of Iranian crude oil are down by about one-fifth so far this year, a drop that puts the country in good position to avoid U.S. sanctions and head off a diplomatic row with Washington.
China has repeatedly defended its crude purchases from Iran, telling the U.S. it complies with existing U.N. resolutions. But October data released Wednesday showed Iran crude-oil imports off 23% from a year earlier, to 458,000 barrels a day, continuing a year-long trend.
China's third-largest supplier of crude as recently as last year, after Saudi Arabia and Angola, Iran this year has slipped to No. 4—surpassed by Russia—shipping about 426,000 barrels a day in the first 10 months of the year.
October's import numbers will be the last used by the U.S. State Department in deciding whether Beijing qualifies for a renewal of its waiver from sanctions, which expires Dec. 25. China won the exemption in late June, after the State Department determined that it had "significantly reduced" crude imports from Iran in the first half of the year. Renewal requires continued significant reductions. The State Department says no decision has yet been made.
The U.S. sanctions are designed to ratchet up economic pressure on Iran to guarantee its nuclear program is for civilian purposes, as Tehran contends. The sanctions ban companies that deal with Iran's central bank from doing business in the U.S.
"China will get the waiver again as imports do indeed seem to be down," said Michal Meidan, an analyst at political risk consultancy Eurasia Group. "The Obama administration will probably prefer not to challenge the new leadership in China if it has sufficient ground for a waiver."
China's Foreign Ministry said Wednesday that it purchases Iranian crude through "normal channels" and based on economic requirements. It reiterated that crude imports from Iran don't harm third parties and that China won't accept unilateral sanctions.
Oil-industry insiders say the decline in Chinese imports appears to be partly an effect of the increased difficulty Iran has in shipping oil because of the global sanctions. Still, a top Chinese oil industry official nodded to the U.S. pressure in a recent interview.
In the first four months of 2012, China's crude imports from Iran were down about 24% from a year earlier due to a commercial dispute between state-controlled China Petroleum & Chemical Corp., 600028.SH -1.15% known as Sinopec Corp., and National Iranian Oil Co., known as NIOC. Although imports recovered in May and June after the dispute was resolved, a European ban on insuring tankers carrying Iranian oil caused China's imports to drop again from July.
In a rare admission of the problems Iran faces, Maziar Hojjati, managing director of the China office of NIOC, said in an interview last week that shipping difficulties related to sanctions contributed to lower crude exports to China earlier this year. Still, the company received indications from Chinese authorities that they had no problem keeping imports at current levels, Mr. Hojjati said. He added that NIOC expects to make up for the earlier reduced shipments to China in the coming months now that some of the company's shipping issues have been resolved.
"We are here to keep our market share in China," Mr. Hojjati said.
It isn't clear whether China's imports will drop further. The International Energy Agency said earlier this month that Iran's crude exports to China were higher in October than September, at 565,000 barrels a day. The shipments are likely to appear in China's November import figures.
By contrast, South Korea's January-October imports were down 40% from a year earlier, and Japan's January-September imports were down 38%. Indian refineries plan to cut imports in the fiscal year that began on April 1 by 14% from a year earlier.
Still, U.S. officials seem aware of the technical challenges Chinese refineries face in replacing heavy, sour Iranian crude with imports of different grades from elsewhere. Carlos Pascual, head of the State Department's Bureau of Energy Resources, said in an interview last month that China appeared to be maintaining the reduced levels of Iranian imports that marked the first half of the year, which would most likely signal another exemption.
Chinese companies acknowledge the balancing act required over Iranian crude imports. They are keen not to upset Washington, which could throw up regulatory roadblocks to their investing in the U.S., where oil production is booming.
Sinopec, which earlier this year struck a $2.5 billion deal with Devon Energy DVN +0.28% to help develop shale fields in Ohio, Michigan and elsewhere, has an agreement with the U.S. to curtail crude imports from Iran, Chairman Fu Chengyu said in a recent interview. He did not elaborate.
Mark Dubowitz, executive director at the Foundation for Defense of Democracies, a Washington think tank that has pushed for more sanctions against Iran, said China will likely receive a second exemption. The State Department's focus, he said, is shifting to other elements of Iran's balance of payments.
"The next area of attention will be on blanket bans of all trade with Iran's energy, shipbuilding, shipping and ports sectors," he said.
—Keith Johnson in Washington, Brian Spegele in Beijing and Benoît Faucon in London contributed to this article.