Iran and China are taking advantage of Saudi weakness with new oil megaproject
Iran and China are taking advantage of the Saudi weakness with new oil projects
Iran and China to exploit the Saudi oil shortage with new projects
Iran wants to poach Saudi oil contracts with new projects
Iran is preparing to capture Saudi market share through new oil projects
Iran prepares to take over Saudi market share
Iran appears to be taking an aggressive step on its share of the Saudi oil market
Iran has been seriously trying to poach major oil supply contracts out of Saudi Arabia since the Tehran-backed Houthi attacks on two of the Kingdom’s main oil facilities on September 14, 2019, especially for coveted Asian customers. Following Saudi decision to unilaterally cut one million barrels per day (bpd) below the latest OPEC + quota originally set last month, Tehran announced last week that the National Iranian Oil Company (NIOC) $ 1.2 billion has been signed for eight new projects. designed to significantly increase crude oil production. While these projects will be broadly managed by Iranian companies, they are part of a patchwork of projects drafted in conjunction with the 25-year deal with China in 2019, in which many Chinese companies will be working on a ‘contract’. only ‘work. basis, albeit many contracts in all business sectors in all areas.
When Iranian Foreign Minister Mohammad Zarif visited his Chinese counterpart Wang Li in August 2019 to present his Chinese hosts with a roadmap on the comprehensive strategic partnership between China and Iran originally signed in 2016, a dramatic phased scale-up The initial strategic cooperation framework for 2016 was agreed. Iran, for its part, had to give China some favorable terms, starting with giving Chinese companies the first option to bid on new or stalled or unfinished oil (and gas) field developments. China would also be given the right to buy all oil (gas and petchems) at a guaranteed minimum discount of 12 percent on the six-month moving average price of comparable benchmark products, plus an additional 6 to 8 per cent of that measure for risk-adjusted compensation. Also critical was that China was allowed to pay for all oil (and gas and petchems) products in soft currencies it has built up doing business in Africa and the former Soviet Union, which effectively gave China a further discount of up to 12 percent, giving a total discount of about 32 percent for China on all purchases of oil, gas and petchems. Related: UAE Oil Major Turns Into Hydrogen
For its part, China’s main commitment to oil – on top of its main political commitment to support Iran in the UN Security Council (over which it has one of only five permanent member votes, with Russia, France, the US and the UK) the other) – was to increase crude oil production from Iran’s West Karoun oil field cluster. At the time, the West Karoun fields – including the vast oil reservoirs of South and North Azadegan, South and North Yaran, and Yadavaran, among other lesser known locations – together produced about 355,000 barrels per day of oil, based on a recovery rate in the West Karoun oil region of only between 3.5 and 5.5 percent. According to the Iranian Ministry of Petroleum, each 1 percent increase in recovery rate from the West Karoun fields will increase recoverable reserves by 670 million barrels, or US $ 33.5 billion in additional oil revenues at an average of US $ 50. per barrel. Considering that the average lifting cost per barrel of crude oil in Iran is almost exactly the same as in Saudi Arabia, at US $ 1-2 per barrel, there is no reason why the recovery rates in each country should not be nearly exactly the same as in Saudi Arabia. well, instead of the roughly 4 percent average in Iran and the current 50 percent average in Saudi Arabia (with realistic plans to ramp this up to at least 70 percent). In August 2019, it was decided between Zarif and Wang that Chinese companies would increase the output of 355,000 bpd from West Karoun by an additional 145,000 bpd in the first phase (to 500,000 bpd) and then by another 500,000 bpd (up to 1 million bpd).
However, it was around that point that the trade war rhetoric began to be scaled up by former US President Donald Trump, along with a consistent increase in sanctions against Iran and those who traded with them following the US’s unilateral withdrawal from the Joint Comprehensive Plan. . of action in 2018. This also meant that China felt it should be softer in its relations with Iran, but that its help was needed more than ever. A year after the US withdrawal from the JCPOA, OilPrice.com focused solely on the real economic figures from Iran, who were grim when you were Iranian. Based on a November 2019 comparative benchmark, Iran’s GDP growth rate as of May / June 2020 was minus 22 percent, unemployment was around 37 percent, inflation over 65 percent and the rial had depreciated at least 65 percent from that period against a basket of global nuclear currencies. Iran also currently had a budget deficit of 80 percent and a trade balance of negative $ 6.5 billion. Related: Saudi Output Reduction Increases Demand for Russian Urals Crude Oil
As a product of this dynamic, two peculiar types of low-key announcements about new developments in Iran (and also Iran-sponsored Iraq) appeared. The first of these involved extremely expensive projects announced in Iran, which was mind-boggling given that it was technically bankrupt, and the second cited new ‘contract-only’ involvement from several firms, all of which were Chinese. Two excellent examples of this new type of announcement were made in July 2020, both regarding developments for supergiant fields in the West Karoun region. The second announcement – the bigger one – came from Iran’s Petroleum Ministry that it had awarded a $ 1.3 billion development deal for more than double oil production in the South Azadegan oil field, while the second such oil project was signed that month. was a development of $ 300 million. contract for the oil site in Yaran. The reality of the situation was that several Chinese companies had been awarded 11 ‘contract-only’ projects in a number of operational areas of oil field development in South Azadegan in Iran, including drilling only contracts, field maintenance only, engineering only, under more just construction and only technology. Another reference to what’s really going on with South Azadegan is that the alleged Iranian lead partner in South Azadegan – Petropars – was also the partner of the China National Petroleum Corporation in the stalled Phase 11 project at the time. super-giant South Pars non-associated natural gas field. “In reality, it doesn’t matter what name is on the publicly available contract, China will just go ahead with what has already been agreed,” a leading oil and gas industry source in Iran said exclusively. OilPrice.com at that moment.
In the same vein, it also doesn’t matter what name is on the financing of the projects announced last week to boost the production of crude oil from West Karoun, as the money Iran needs to achieve the goals that have been agreed In the 25-year deal with China, Beijing will happily provide it, given Iran is irreplaceable in its multi-generation global power-shifting ‘One Belt, One Road’ plan. It is true that Iranian Petroleum Minister Bijan Zanganeh said last week that the oil projects will be funded through bond issues, but it is equally true that all these bonds that cannot be easily bought in the markets will be bought by Chinese or China. related entities. Indeed, as reported exclusively by OilPrice.com in October 2019, it was China that agreed with Iran to act as a backstop on a new type of bond that would be an issue in Iranian rials, but – crucially for potential foreign buyers – with them the ability to be redeemed not only in rials, but also in a range of more common currencies at the prevailing spot rate on the day the buyer decided to redeem the paper. While the full range of currencies had yet to be finalized, they included Chinese renminbi and Russian rubles for now, plus possibly euros, Japanese yen and Swiss francs.
Additionally, again as highlighted exclusively by OilPrice.com, May 2020 saw a small and annoying-looking announcement of the ratification of a statute related to the issuance of securities on Iranian government websites that was unsurprisingly ignored by the rest of the international media from the world. However, the blank statement that Iran’s first vice president, Eshaq Jahangiri, signed the issuance of Islamic compliant securities in the calendar year 1399 (which began on March 20, 2020) meant Iran would gain access to a massive new flow of capital. that it would use to boost its oil and gas development program. All of this, OilPrice.com stressed at the time, would be held back by China and this is exactly what NIOC director, Masoud Karbasian, alluded to last week when talking about the sale of 30 trillion (US $ 712.5 million) in bonds. to fund the new projects with plans to spend at least an additional 20 trillion IRR in the near future if needed.
By Simon Watkins for Oilprice.com
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