China slows Iran oil work as U.S. energy ties warm
The U.S. operations of foreign firms operating in Iran's energy sector could be targeted under sanctions.
October 28, 2010 1:12 by Reuters
China’s top energy firms have slowed work on projects in Iran as their ties grow with U.S. energy companies, a blow to Tehran as it struggles under sanctions to attract investment in its strategic oil sector.
OPEC’s second-largest producer, needing billions of dollars just to maintain its oil output capacity, has turned to China to fill the vacuum left by Western firms that have withdrawn under political pressure as the U.S. and its allies look to halt Tehran’s nuclear programme.
But the Chinese government informally instructed firms to slow down after the U.S. imposed unilateral sanctions on Iran in late June and as two of China’s top three energy companies, CNPC and CNOOC Ltd, worked toward deals that gave them greater access to the U.S. energy sector, Beijing-based sources at the companies said.
The U.S. operations of foreign firms operating in Iran’s energy sector could be targeted under sanctions. As China’s presence in the U.S. energy sector grows, so does its potential exposure to the sanctions.
“The political pressure came directly from the government… and I believe it’s logical to draw a link with these U.S. deals,” said one industry official with knowledge of China’s overseas oil and gas activities.
Third-largest oil and gas firm China National Offshore Oil Company (CNOOC), parent of New York-listed CNOOC Ltd , announced earlier this month a $1.1 billion shale gas deal with independent U.S. firm Chesapeake Energy. The deal, pending final U.S. government approval, was its first since its 2005 bid for U.S. firm Unocal was blocked by U.S. regulators and politicians.
China’s top energy firm CNPC agreed in September to explore Australia gas with U.S. major Chevron Corp .
The U.S. may have offered improved access to its energy sector for Chinese firms in exchange for Beijing’s support for the last round of sanctions imposed by the U.N. security council in June, one analyst said.
China, one of Iran’s main trade partners and a permanent member of the council, supported those sanctions on condition they would exclude sanctions on Iran’s energy sector.
“As part of its ongoing efforts to convince China to implement sanctions against Iran, the U.S has been discussing access by China to its energy market,” said a Beijing-based political analyst who requested anonymity due to the sensitivity of the matter.
Chinese firms have taken up development roles in some of Iran’s prize energy assets, such as the South Pars gas field and the Azadegan and Yadavaran oilfields.
But CNPC has yet to drill its first well at phase 11 of the South Pars gas field, after earlier this year sealing a $4.7 billion deal to develop that part of the world’s largest pure gas field. It had previously expected to start drilling as early as March.
“The company has instead been focusing on paperwork, appraising the reserves and mapping out development plans, rather than putting in active work on the ground,” said the first industry official.
CNOOC, parent of New York-listed CNOOC Ltd , has made little headway on its North Pars project, after a $16 billion framework deal in late 2006 to develop the field and build facilities to export liquefied natural gas (LNG), industry sources said.
While slowing down, sources said CNPC, which has the largest number of projects among Chinese firms in Iran, would continue to fulfil its contracts.
“Strategically China is not going to give up on Iran,” said a second executive with knowledge of the sector’s overseas strategy.
Spokespersons at all three state firms declined comment.
Industry newspaper Upstream reported this month that CNPC’s engineering arm and upstream research unit have halted work on South Azadegan oil project, despite CNPC’s recent move to advance the deal from a memorandum of understanding to a commercial contract.
CNPC signed a preliminary deal with National Iranian Oil Company in early 2009 to take a 70 percent stake in the oil project.
Gas projects are more likely to face delays than oil work, as CNPC and its New York-listed unit PetroChina <0857.HK> have both stepped up gas investments in Australia.
“With PetroChina’s potential to take significant gas volumes from Australia through its Shell (Arrow) deal, and CNPC’s agreement with Chevron to look at the Wheatstone project, I am not convinced China has a huge need for Iranian gas,” said Gavin Thompson of energy consultancy Wood Mackenzie.
“Putting together the technical/US sanction issues, we are not convinced that the development will move ahead for some time”.
Many of the patents and much of the manufacturing capability for oil and gas technologies lie with Western firms that have to stay away from Iran. China lacks the technology to complete liquefied natural gas (LNG) export facilities itself.
“Progress has slowed there as it became difficult to bring in equipment from third-party countries,” said the second senior industry official.
Supplies companies are struggling to source include units to separate water and oil, pumps, valves and software, they said.
The problems would likely delay first oil from CNPC’s other big Iran oil project, North Azadegan, by about two years to beyond 2015, one official said. Initial plans under a $2-billion deal signed in January 2009 were for production to reach 75,000 bpd in the first four years of development.
It was not clear if Sinopec Group, China’s number-two energy firm, has slowed work on its main venture, a $2-billion scheme at Yadavaran, where the firm has deployed nearly 200 people.
“I don’t think there has been major impact… First output should come next year, as scheduled,” said a third industry executive with knowledge of Sinopec’s overseas operations.
(Editing by Simon Webb)