China Wants Even Better Terms For Crucial Iran Oil Project

The ramping up of crude oil production from Iran’s extremely oil-rich West Karoun fields – including, most notably, North and South Azadegan, North and South Yaran, and Yadavaran – to at least 1 million barrels per day (bpd) remains one of Iran’s core strategic economic priorities. This precise increase in crude oil production from the West Karoun fields, up from the then-355,000 bpd level, was also a key part of China’s commitment in its 25-year Strategic Cooperation Agreement with Iran, as analysed in depth in my last book on the global oil markets. Reports last week that China is not to move ahead on some of these West Karoun commitments are incorrect: China is genuinely looking to move ahead on these developments in one way or another, but it wants even better terms for itself than the ones agreed in the 25-year deal.

Comments from high-level Iranian officials on all hydrocarbons-related subjects have to be taken with a degree of scepticism, but they do act as a frame of reference at least for the truth. Last week, the director of investment and business of the National Iranian Oil Company (NIOC), Fereydoun Kurd Zanganeh, stated that: “Despite the sanctions [reimposed by the U.S. after its unilateral withdrawal from the Joint Comprehensive Plan of Action, ‘JCPOA’], the NIOC, in line with the strategic document of long-term cooperation between Iran and China, continues to negotiate with the private and state companies of this country for the development of the Yadavaran field and other joint fields in Iran.” He added that the first phase of the Yadavaran oil field was completed by China Petroleum & Chemical Corporation (‘CPCC’, or ‘Sinopec’) in 2015 with a capacity of 110,000 bpd and is still productive. He underlined that: “According to the negotiations with this company, the second phase of the development of this joint field was also planned to be handed over to this company, but unfortunately, at that time, the former oil minister stopped the negotiations – therefore, in the past year, NIOC has conducted regular negotiations with Chinese companies in the development of oil and gas fields.”

According to a senior source who works closely with Iran’s Petroleum Ministry spoken to exclusively by last week, it is true that the pace of development of Yadavaran – and other fields – by the Chinese slowed after the U.S. withdrawal from the JCPOA in 2018. It is also the true, though, that neither of the real reasons for this were to do with a desire on China’s part to withdraw from Iran’s oil (or gas) fields or to roll back on its commitments in the Iran-China 25-year deal. In fact, the first reason was that China decided to take a more cautious approach on areas that might provoke the U.S. from 2018, which included high-profile oil and gas developments in Iran. “The reimposition of sanctions on Iran by the U.S. in 2018 came at around the same time as the Trade War between the U.S. and China was heating up, so Beijing moved from taking high-profile development roles in Iran to engaging in lower-profile contract-only projects, albeit lots of them,”  he said. “This relates to the Iranian fields in which Beijing has an interest – including those in the West Karoun cluster – and to several in Iraq, particularly those whose reservoirs are shared with Iran,” he added.  

Indeed, Iran’s Zanganeh hinted at the same thing last week: “Now, due to the identification of the shareholders of the consortium developing this [the joint Azadegan] field, NIOC, as the employer, has requested in our negotiations with this Chinese company to be present as an investor in this field.” He added: “Last year, Sinopec, which has a history of cooperation with Iran in the first stage of the development of the North Azadegan field, offered to cooperate with us again.” This is precisely what is happening across the key Iranian and Iraqi shared fields, which the Chinese regard as one entity, according to the Iran source, and these include: Iran’s Azadegan oil reservoir (split into North and South fields) which is exactly the same reservoir upon which sits Iraq’s huge Majnoon oil field. This same feature applies to Yadavaran (on the Iran side)/Sinbad (on the Iraq side), Azar (Iran)/Badra (Iraq), Naft Shahr (Iran)/Naft Khana (Iraq), Dehloran (Iran)/Abu Ghurab (Iraq), West Paydar (Iran)/Fakka/Fauqa (Iraq), and Arvand (Iran)/South Abu Ghurab (Iraq), along with many, many others. Indeed, just over one week ago, PetroChina cemented its control over Iraq’s supergiant West Qurna 1 oil field, as news emerged that the U.S.’s ExxonMobil is finally close to being able to sell its 32.7 percent stake in the site.

This effective takeover of West Qurna 1 by PetroChina followed a gradual corollary build-up of its presence by China in this field’s case, in the first instance through the supposedly US$121 million engineering contract-only award made to the China Petroleum Engineering & Construction Corp (CPECC) for West Qurna 1 in the middle of 2021. The same contract-only model was evident in CPECC’s being awarded a US$203.5 million engineering contract in Iraq’s neighbouring supergiant Majnoon oil field. Soon after these awards, China’s Anton Oil entered Majnoon as well, on a ‘project management and development services’ contract. 

Crucially here in terms of Zanganeh’s comments last week, it is apposite to reiterate that Majnoon is one field of the same reservoir shared with Iran – on the Iranian side it is called Azadegan. This Iranian field, in turn, is split into two supergiant fields – North Azadegan and South Azadegan. The China National Petroleum Corporation (CNPC) – whose listed arm is none other than PetroChina (now controlling Iraq’s West Qurna 1) – is still the lead foreign operator in Iran’s North Azadegan, and its operation in North Azadegan went live in November 2016 with production capacity of 75,000 bpd. CNPC also held the lead developer position in Iran’s South Azadegan from 2009 to 2014 until it was expelled from that field for delays in progress. However, as highlighted by last week, since then, Chinese companies have again been working on low-key projects in South Azadegan, alongside the nominal Iranian lead developers. 

This is the second reason that China’s pace of involvement in Iran’s West Karoun fields – which together have over 67 billion barrels of oil in place – has slowed. “China knows that Iran doesn’t have many international options left, so it is looking to optimise the deals it can get on current and future oil and gas field developments, including in the West Karoun fields, especially the shared ones,” underlined the Iran source last week. The deal China had, under the terms of the 25-year Strategic Cooperation Agreement, is as follows, as exclusively broken by me on 3 September 2019 and analysed in full in my last book on the global oil markets. Chinese companies have the first option to bid for involvement on any new oil, gas and petrochemical developments and on any stalled or uncompleted developments. Chinese companies will also have first call on any of the oil, gas and petrochemicals produced according to pricing formulae contained in the Agreement. The previous pricing formula for oil was this: China could buy Iran’s oil at a minimum guaranteed discount of 12 percent to the six-month rolling average price of international comparable oil benchmarks, plus another 6-8 percent of that metric for risk adjusted compensation – so, up to a 20 percent discount in total from the international benchmarks. 

Now, though, China wants the new pricing that it has been paying on an ad hoc basis for Iranian oil to be formalised and applied to all of its purchases of oil and related products coming from fields it was previous involved in and any new field developments involving it, according to the Iran source. “Currently, China pays Iran up to 10 percent less for its crude oil than it pays Russia for its crude oil, and the price it pays for Russian crude oil is discounted from the international benchmark by a minimum of 30 percent,” he told last week. “On average, the Chinese discount for Iranian crude oil to the international benchmark over the last 12 months is around 44 percent,” he added. “But, it is even worse for Iran, as – from 11 November 2022 – China has been paying Iran in non-convertible Yuan, that is Yuan that can only be used inside China and/or spent buying Chinese goods,” he said. “Worse still is that whilst Yuan is the key instrument in payment, China is also using the currencies of Angola, Zambia and Kenya to pay Iran, and China is doing this as a means to induce Iran to buys goods from these countries so that these countries, in turn, can service their loans to China,” he concluded.