Iranian Energy Chronicles: New Episode, Same Old Script
The latest episode of the Iranian Energy Chronicles has just been released, however it’s not much different than previous episodes. In fact, you have to watch closely just to make sure it’s not a rerun from last season.
This time China plays a supporting role. Iran reappears as the protagonist while the US and its allies are the evil perpetrators, the classic antagonists that just can’t seem to get along with the other kids on the block.
In this latest installment, China’s CNPC claims that it has some money problems. News broke last week that the Chinese oil major was struggling to finance phase 11 development of the Iranian offshore South Pars natural gas field. In fact, an Iranian official said that CNPC had “some difficulties [developing the project],” and that “it had not brought its financing.”
The statement came a few days after a report in an Iranian newspaper claimed that CNPC had withdrawn from the field. Later however both Iran and CNPC refuted that particular claim. In 2009, Tehran signed a $5-billion contract with CNPC to develop the field.
However, all may not be what it appears. How can CNPC, one of the largest oil and gas companies in the world, with 23.2 billion barrels of oil equivalent (boe) proved oil and gas reserves, and 1.6 billion-boe production in 2011, have financing problems?
Admittedly, CNPC and its subsidiary PetroChina did suffer losses last year at its refining operations mostly due to high oil prices and state controlled prices of petroleum products. Yet, according to a Fitch ratings report in April, CNPC and PetroChina continue to generate “strong cash flow” from operations due to its profitable upstream and retail operations.
So, if cash flow and financing aren’t the problems — what is? Some Iranian reports blamed CNPC for the fallout, saying that they had delayed the project for more than three years and had not even begun preliminary work. But we’ve heard this all before. French oil major Total SA (TOT), which earlier withdrew from the South Pars project, had similar accusations leveled against them by Iran as well. They eventually pulled out.
At any rate, in this episode, Iran blames CNPC and CNPC says it’s broke. So, what’s the answer? Can’t we all just get along?
Sanctions and international pressure are the primary culprits. In fact a CNPC source told the National Business Daily last week that the situation regarding Iran”s nuclear program and political environment have made investment unstable and risky, and that there is a high degree of difficulty in developing the gas field.
Sanctions & Iran’s gas dilemma
“Iran’s oil and gas sectors have critical structural problems,” according to “The Iran Primer,” a book published by the United States Institute of Peace. “Subsidized prices and a population that has doubled since the 1979 revolution have created excessive demand. Supply has been stymied by under investment caused by financial constraints, technical shortages and sanctions.”
Western sanctions are indeed cutting into Iran’s oil and gas revenues, bone deep, however it’s also a double-edged sword. It is wishful thinking to believe that sanctions alone will stop Iran’s feverish race to develop its nuclear program. Though Obama will likely use recent sanctions to do some political posturing in upcoming presidential debates with Mitt Romney, Iran pushes forward “hell-bent-on-destruction” as my mother used to tell her four sons growing up in Southeast Georgia when we were doing something dim-witted. Irritant the sanctions are for Iran, a game changer – they are not.
Undoubtedly, both Iran and CNPC have high hopes for the South Pars field, which is the world’s largest. The field is in the Persian Gulf and shared by Iran and Qatar. According to the US Energy Administration Agency (EIA), Iran’s estimated proven natural gas reserves stood at 1,046 trillion cubic feet (Tcf) as of January 2011, the world”s second-largest after Russia. The South Pars field, only a portion of which is in Iranian territory, comprises over 47 percent of Iran’s total reserves and produces 35 percent of its gas.
Annual revenue from exports from the South Pars field is projected to reach $100 billion according to the Pars Oil and Gas Company (POGC). Last week the company’s managing director, Mousa Souri, said that Iran plans to increase its daily gas exports to 400 million cubic meters by developing the remaining phases of the field.
Though the South Pars field is massive, Iran is still a new importer of natural gas while Qatar is the world’s leading LNG exporter. Iran’s gas sector is under-developed and used mostly to meet domestic demand, while natural gas accounts for 54 percent of Iran’s total domestic energy consumption. In 2010, Iran was the world’s fourth largest producer and third largest consumer of natural gas.
CNPC has been present in Iran’s oil and gas sectors since 2004. The Chinese oil major is developing Iran’s Masjed Soleyman oil field in collaboration with the National Iranian Oil Company (NIOC). After completion of both phases of the field, production is expected at up to 55,000,000 bbl/d, according to Iran’s Jaam-e Jam newspaper.
In addition, CNPC is developing Iran’s North Azadegan field in conjunction with NIOC –Iran’s biggest find in 30 years when announced in 1999. The field contains 26 billion barrels of proven crude oil reserves, in a two-phase development with ultimate total production estimated at 150,000 bbl/d (75,000 bbl/d for each phase), according to the EIA.
Not only is CNPC in Iran so is China’s Sinopec. Sinopec signed a buyback contract at the end of 2007 to develop Iran’s Yadavarn oil development project. The first phase will produce at a plateau of 85,000 bbl/d (by 2014), while the second will boost production to 1850,000 bbl/d by 2016. According to Iran’s Oil Ministry Annual Bulletin the field is estimated to have reserves of up to 17 billion barrels of oil, with 3 billion barrels considered to be recoverable.
The $2 billon deal named Sinopec as the operator with a 51 percent stake in the project while NIOC holds the remaining interest.
As this current episode of the Iranian Energy Chronicles unfolded between CNPC and Iran, the US was on script, playing its part and hit Iran again with fresh sanctions.
Last week a new package of sanctions passed by Congress along with an executive order signed by President Obama targeted Iran”s energy, petrochemical and financial sectors. Obama said the new sanctions would further pressure the country for failing to meet international nuclear obligations.
The new legislation endeavors to sanction banks, insurance companies and shippers that help Iran sell its oil by circumventing current sanctions, such as through the reflagging of Iranian ships. It puts nearly all of Iran”s energy, financial and transportation sectors under US sanctions.
Caught in the cross hairs of these new sanctions were China”s Bank of Kunlun and an Iraqi bank, accused of doing business with Tehran.
Both Iran and China were quick to counter. Iran’s foreign ministry accused the West of seeking plans to disrupt the growth of Asian nations, chief among them being a plan to insecure energy markets in the Middle East.
The Tehran based Jaam-e Jam newspaper reported that Ramin Mehmanparast, Iran’s Foreign Ministry spokesman, said in a meeting with the Chinese deputy foreign minister for disarmament Ma Gaw Sho, that Asia’s emerging economies have concerned the West, especially the United States, which are after plans to cause disruption in the way of fast growth of Asian nations.
“Attempt to insecure the energy market in the Middle East is chief among plans by the West to slow down the economic growth of its Asian rivals,” Mehmanparast said.
If Iran’s response was disingenuous, China’s response was one of open resentment. The China Daily ran an article titled “Washington abusing Iran sanctions” on August 3. The article says that Washington damaged ties between the two nations and that the US should “correct its erroneous decision, lift the unprovoked sanctions against the Bank of Kunlun and stop harming Chinese interests and Sino-U.S. relations.”
At the same time, China’s foreign ministry issued a brief statement expressing “strong dissatisfaction and firm opposition” to the US move and said it would officially protest the decision.
However China is pragmatic if nothing else and realizes that even though it cuts deals with Iran as long as there are sanctions in place, problems will persist. Not only that, China’s aim is not one of confrontation, especially with the West, but one of energy security, insuring that its juggernaut economy can continually be fueled — literally. They realize that they do not have the military power nor the blue ocean navy to shield Iran. In short, not only does the Middle Kingdom need Iranian oil and gas, it needs the West to play along as well.
Next episode coming soon
Even so, as deals are cut, as accusations, ill-will and tempers flare over implementation of those deals as well as sanctions, Iran is not likely to give up its nuclear ambitions unless forced to do so, meaning either American or Israeli military force. Though that discussion will have to wait until another day, suffice it to say, Iran –with no real allies in the region, save Syria, who is at civil war and whose leader could plausibly be expected to suffer a similar fate as that of Muammar Gaddafi if rebel resistance wins the day — is no friend of its Arab neighbors. If regime change in Iran is forced by the sword, few states in the region would shed many tears other than the usual media inspired grumbling and chest beating in Middle Eastern capitals. Life would go on in the region, and elsewhere for that matter, oil would still flow, and the world would be rid of yet another dangerous regime. The next episode of the Iranian Energy Chronicles is set for release soon, hopefully the next installment will not look like just another rerun.