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Washington — China and the US are in an intense standoff over Iranian crude oil, with China indicating they may continue to import those medium and heavy barrels even after a sanctions waiver expires next week and the US threatening potentially severe consequences if they do.

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"Really, we're now in a pretty serious poker game," said Richard Nephew, the principal deputy coordinator for sanctions policy at the US State Department during the Obama administration.

"It's a game of chicken, where neither side is prepared to fully concede, but each recognizes mutual interest in avoiding a collision," said Suzanne Maloney, deputy director of the Foreign Policy program at the Brookings Institution.

Beijing has called its oil trade with Iran lawful, formally criticizing the Trump administration's decision to allow waivers, known as significant reduction exceptions, to expire May 2 and indicating that oil flows may continue in spite of sanctions.

The Trump administration has publicly given little indication that it will allow China to import any Iranian crude, without facing full sanctions enforcement.

"What we are saying to countries is that they have a choice," Brian Hook, the US State Department's special representative for Iran, said in a call with reporters Thursday. "They can either do business with the United States and with the global financial system, or they can import Iranian crude oil -- but they can't do both."

But analysts said it remains unclear if the US is willing to fully enforce sanctions against potential flows of crude between Iran and China, knowing the impact that sanctions on a major Chinese bank, for example, might have on the global financial system.

"If China flagrantly violated the sanctions, the United States will have to respond or risk a substantial loss in credibility," said Elizabeth Rosenberg, director of the energy program at the Center for a New American Security and a former senior sanctions adviser at the Department of the Treasury.

If China does import Iranian barrels after its waiver expires next week, the US could sanction any person or entity in the value chain, including the bank that processed the transaction, refineries, ship operators, insurers, flagging authorities and more.

But such comprehensive imposition of sanctions could have far-reaching impacts, Rosenberg said.

"The United States has to ask itself whether it wants to engage in a major economic ambush of the global economy announcing that kind of designation which will have spillover effects everywhere in the world, including in the United States, that are very significant," she said.

China is the world's largest buyer of Iranian crude. In March, China imported nearly 628,000 b/d of Iranian crude, about 37% of the total 1.7 million b/d Iran exported that month, according to cFlow, Platts trade flow software data and shipping sources. China has imported an average of about 625,000 b/d of Iranian crude over the past year, according to Platts estimates.

TRADE DEAL OR IRAN?

Nephew, now a senior research scholar at the Center on Global Energy Policy at Columbia University, said the US' approach to Iran sanctions enforcement toward China may depend heavily on the state of trade talks between the two nations.

"I think it really comes down to what is the dominant interest in the White House: Iran or a trade deal with China," Nephew said. "And, I think Trump goes for the deal. But, they're hopeful that the Chinese will cooperate enough that they'll have a credible story why sanctions are not necessary or will instead hit some minor institutions and claim those are the ones."

Both Rosenberg and Maloney said if China does continue to import Iranian crude, the US will likely target smaller, less interconnected Chinese financial institutions and, possibly, individuals.

"I can't predict quite where we end up," Maloney said. "But my guess is that the Chinese see more utility in a temporary show of flexibility coupled with rhetorical defiance."

Questions have been raised about whether Chinese equity production in Iranian oilfields may be subject to US sanctions, something the Trump administration has declined to discuss publicly.

"We have nothing to announce on that," Francis Fannon, assistant secretary at the US State Department's Bureau of Energy Resources, said Thursday.

Chinese state-owned oil companies are involved with a few equity oil ventures in Iran, such as CNPC in North Azadegan and South Azadegan, while Sinopec has a project in Yadavaran.

In addition, the US may choose not to sanction Iranian crude sent to China to repay debt, according to Sara Vakhshouri, president of SVB Energy International. Since these barrels would be used to repay debt and not generate revenue for Iran, the US may permit them, Vakhshouri said. She estimated that as much as 200,000 b/d of Iranian crude could be shipped to China in the form of debt repayment.

The State Department declined to comment on this possibility Friday.

"All we can announce is that no additional SREs will be issued," a State spokeswoman said Friday.

-- Brian Scheid, brian.scheid@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com