China, Iran Sign $2 Billion Oil Production Agreement

by Wang Ying & Dinakar Sethuraman (source: Bloomberg)
Monday, December 10, 2007

Dec. 10 (Bloomberg) -- China Petrochemical Corp. signed a $2 billion agreement to develop Iran's Yadavaran oil field, advancing prospects for a contract on the sale of liquefied natural gas to the world's fastest-growing major economy.

The field will produce 85,000 barrels a day in four years and a further 100,000 barrels a day three years after that, China's official Xinhua news agency cited Iranian Oil Minister Gholam Hossein Nozari as saying yesterday. Under an initial agreement in 2004, China would pay Iran as much as $100 billion over 25 years for LNG and oil and 51 percent stake in Yadavaran.

Sinopec Group, as China Petrochemical is known, hopes to talk about liquefied natural gas supplies ``later,'' Iran's state news agency IRNA said today, citing Zhou Baixiu, president of Sinopec Group's international exploration and production unit. China is ``willing'' to buy LNG from Iran, Zhou said.

China, a veto-holding member of the United Nations Security Council, has resisted pressure from the U.S. to isolate Iran and impose a third round of international sanctions over the country's nuclear program. The Chinese government wants its oil and gas producers to step up their global search for energy resources to meet rising consumption, spurred by an economy that surged 11.5 percent in the third quarter.

``This is a commercial deal, I don't think China will worry about the political tensions between the U.S. and Iran,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. ``News that Iran probably stopped its nuclear weapon program in 2003 is a good sign that it poses no imminent threat to the U.S.''

Initial Agreement

Sinopec signed an initial agreement to buy 250 million metric tons of LNG from Iran over 30 years, National Iranian Oil Co.'s Senior Vice President of Development S.M. Hosseini told reporters in Beijing on Oct. 29, 2004.

The agreement yesterday is the largest energy contract between China and Iran, said Ying Xiaodong, an oil analyst with Citic Securities Co.

Zhang Zheng, spokesman for overseas affairs at Sinopec Group, as China Petrochemical is known, today said from Beijing he is ``not authorized to disclose information about the Iran project.''

Defense Secretary Robert Gates Dec. 8 called on U.S. allies to ``intensify'' economic and diplomatic pressure on Iran to suspend non-nuclear weapons uranium enrichment and allow verification that it doesn't resume a nuclear weapons program.

Nuclear Technology

Iran hasn't proven to the world that it has been developing nuclear technology exclusively for peaceful purposes, United Nations Secretary-General Ban Ki-moon said Dec. 7.

The agreement with Sinopec shows that U.S. claims that international companies are not willing to invest in Iran are baseless, IRNA said, citing the oil minister. The accord with Sinopec was delayed by ``tough commercial negotiations'' instead of the U.S. threat of sanctions, the agency said.

Talks on Yadavaran were delayed because Sinopec asked for a higher rate of return from the field, Agence France-Presse said in a report on its Web site, citing Nozari.

Sinopec's period of reimbursement has been halved to four years in the final contract, the report said, without giving details. Iran's constitution bars the sale of equity in the nation's oil and gas fields. Investors are compensated for their spending in oil and gas, a method known as ``buyback.''

Recoverable Reserves

According to Iranian estimates, the Yadavaran field has ``in-place'' reserves of 18.3 billion barrels of oil and 12.5 trillion cubic feet of gas, of which 3.2 billion barrels oil and 2.7 trillion cubic feet of gas are recoverable, Xinhua said.

Iran was China's third-biggest supplier of crude oil through the first 10 months of this year, according to the Beijing-based Customs General Administration. China's oil demand will increase 5.4 percent to 7.5 million barrels a day this year, the International Energy Agency said in its November forecast.

``The Chinese government is interested in diversifying sources of crude oil production and its national oil companies have more flexibility in going to places that the international oil companies can't,'' said Shum. ``China has been importing crude oil and fuel oil from Iran so Sinopec is keen to complete the deal.''

Earlier Deals

Sinopec Group in June 2006 agreed to buy OAO Udmurtneft, an affiliate of BP Plc, to produce oil in Russia for the first time. China National Petroleum Corp., the nation's biggest oil producer, bought PetroKazakhstan, which accounts for about 12 percent of Kazakhstan's oil output, for $4.18 billion in October 2005.

Cnooc Ltd., the country's biggest offshore oil company, paid $2.7 billion for a 45 percent stake in Nigeria's OML 130 oil area, also known as the Akpo deposit, from privately owned Nigerian company South Atlantic Petroleum Ltd.

Sinopec Group is the parent of China Petroleum & Chemical Co., known as Sinopec Corp., which is listed on stock markets in Hong Kong, New York, London and Shanghai.

To contact the reporter on this story: Wang Ying in Beijing at ; Sophie Tan in Singapore at

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