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Iran Deepens Energy Ties With Asia

Oxford Analytica, 04.22.10, 06:00 AM EDT

While the U.S. pushes for sanctions, Beijing seeks to balance its strategies towards Washington and Tehran.

Washington's push for new U.S. and international sanctions against Iran over its nuclear program has put the spotlight on Iran's energy ties with Asian countries, particularly China. In keeping with its interest in forging deeper strategic relationships with rising Asian powers, Iran has since the 1990s looked to Asia as a market for its hydrocarbon commodities and for partners in an industry constrained by U.S. sanctions. Until recently, China had restrained its investments in Iran in an attempt to balance relations with Washington and Tehran. However, since 2007, Beijing has secured a number of important energy deals in the country.

Iran-China. Iran's top four export markets for its crude oil are Japan, China, India and South Korea, in that order. Tehran hopes that demand growth will push China (which currently imports approximately 50% of its crude oil needs) ahead of Japan.

Attempts to woo China stem from a commercial desire to attract investment, as well as a belief that deeper Chinese interests in Iran will make Beijing more resistant to further U.N. sanctions against Tehran. Yet to date, Iran has a lackluster record of attracting investment in the petroleum sector. This is despite President Mahmoud Ahmadi-Nejad's claim in November that approximately $67 billion has been invested there during the past four years. A member of the Majlis Energy Committee said recently that such investment (domestic and foreign) amounted to about $34 billion, falling far short of the $100 billion goal in the Fourth Five Year Plan. Ahmadi-Nejad's figure probably includes agreements that have been signed but await finalization.

Chinese investment. Various agreements between China and Iran have stalled at the Memorandum of Understanding (MOU) stage, but a number of contracts have been finalized. This is noteworthy given Beijing's earlier hesitation to sign investment contracts, which might be subject to secondary sanctions under U.S. law. During the early 2000s, China's major national energy companies laid the groundwork for the eventual development of upstream equity positions in Iran. The government in Beijing restricted this activity to exploration and service contracts, and to MOUs. However, in recent years, China's approach has changed:

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--In December 2007 Sinopec concluded a contract for first-phase development of the Yadavaran field based on a 2004 MOU with the National Iranian Oil Company (NIOC).
--In January 2009 China National Petroleum Company (CNPC) signed a buyback contract with NIOC to take the lead in developing the North Azadegan oil field in two phases. Phase one, expected to take 48 months, will add approximately 30,000 barrels per day (b/d) of production. Phase two, over 42 months, will add 75,000 b/d, bringing Azadegan's total production to 150,000 b/d.
--CNPC this year finalized a deal to develop phase 11 of Iran's South Pars gas field. It displaces Total, which had originally been slated to oversee both upstream development and downstream exploitation. The buyback contract for the upstream section of this project is worth about $5 billion.

Iran is attractive to China as one of the few places in the Gulf where foreign companies can access upstream resources directly. However, the key question is whether Washington will implement its secondary sanctions law against those Chinese companies that operate in the United States while also investing in Iran's energy sector, as Washington has in the past used a presidential waiver to overrule punitive measures against non-U.S. companies.

Outlook. Beijing faces the delicate task of seeking to balance its strategies towards Washington and Tehran. While it is likely to impose some limits on its Iranian investments, the contracts signed to date suggest a degree of confidence that it can resist U.S. pressure.

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