CHINA-IRAN: STRATEGIC OIL PURCHASE AGREEMENT

The Petroleum Economist disclosed (September 3) that Iran's Foreign Minister Mohammad Zarif visited his Chinese counterpart Wang Yi at the end of August 2019 to present a road map for the China-Iran comprehensive strategic partnership, which was signed in 2016. While many of the key specifics of this new understanding will not be released to the public, the central pillar of the new deal is that China will invest $280bn developing Iran's oil, gas and petrochemicals sectors. This amount may be front-loaded into the first five-year period of the deal but the understanding is that further amounts will be available in every subsequent five-year period, subject to both parties' agreement. There will be another $120bn investment in upgrading Iran's transport and manufacturing infrastructure, which again can be front-loaded into the first five-year period and added to in each subsequent period should both parties agree. Among other benefits, Chinese companies will be given the first refusal to bid on any new, stalled or uncompleted oil and gasfield developments. Chinese firms will also have first refusal on opportunities to become involved with any and all petchems projects in Iran, including the provision of technology, systems, process ingredients and personnel required to complete such projects. An Iranian source said "This will include up to 5,000 Chinese security personnel on the ground in Iran to protect Chinese projects, and there will be additional personnel and material available to protect the eventual transit of oil, gas and petchems supply from Iran to China, where necessary, including through the Persian Gulf." Under the terms of the new agreement, Petroleum Economist understands, China will be granted the right to delay payment for Iranian production up to two years. China will also be able to pay in soft currencies that it has accrued from doing business in Africa and the Former Soviet Union (FSU) states, in addition to using renminbi should the need arise—meaning that no US dollars will be involved in these commodity transaction payments from China to Iran. Another positive factor for China is that its close involvement in the build-out of Iran's manufacturing infrastructure will be entirely in line with its One Belt, One Road initiative. China intends to utilise the low cost labour available in Iran to build factories, designed and overseen by large Chinese manufacturing companies, with identical specifications and operations to those in China, according to the Iranian source. The Iranians expect three key positives from the 25-year deal: (i) China is one of the five P-5 countries in the UNSC so Iran now has two out of five UNSC votes on its side. (ii) the deal will allow Iran to finally expedite increases in oil and gas production from three of its key fields. China has agreed to up the pace on its development of one of Iran's flagship gas field project, Phase 11 of the giant South Pars gas field (SP11). China National Petroleum Corporation (CNPC), one of China's 'big three' producers, added to its 30pc holding in the field when it took over Total's 50.1pc stake, following the French major's withdrawal in response to US sanctions. CNPC had since made little progress developing SP11—a 30pc+ discount to the global market price on potential condensate and LNG exports could change that. China has also agreed to increase production from Iran's West Karoun oil fields—including North Azadegan, operated by CNPC, and Yadavaran, operated by fellow 'big three' firm Sinopec—by an additional 500,000bl/d by the end of 2020. (iii) China has agreed to increase imports of Iranian oil, in defiance of a US decision not to extend China's waiver on imports from Iran in May. China's General Administration of Customs (GAC) figures released in late August show that, far from reducing its Iranian imports, China imported over 925,000bl/d from the country in July, up by 4.7pc month-on-month, from an already high base. According to the Iranian source, the actual figure is still higher, with excess barrels being kept in floating storage in and around China; without having gone through customs they do not show up on customs data, but are effectively part of China's Strategic Petroleum Reserve.





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