China National Petroleum Corporation (CNPC) has replaced Total of France as a major operator in the development of phase 11 of the South Pars gas field. This is a substantial gain for the Iranian government, which strives to lure international investors to shore up its economy following the withdrawal of most foreign companies from the market due to US sanctions in last August and November. However, the project appears to hit many hurdles, including the Chinese company’s fears of heavy US fines or escalation of the US ongoing trade war against the county in the coming period.
Numerous Gains
Based on the new financial structure of the project, the share of the CNPC is set to increase to 80.1% instead of 30%, while the other share of 19.9% goes to Petropars, an Iranian company, which gives the former the right to run the project and to sell its production. Under the previous agreement, Total alone accounted for 50.1% of the project.
What encouraged the Chinese side to seal the deal is that the agreement signed between Total and the Iranian government in 2017 included a clause giving the Chinese company priority in taking over the role of the project operator in the event of a re-imposition of US sanctions on Iran. However, the schedule for the operation of the project is yet to be determined, according to Iranian oil minister Bijan Zanganeh.
It is not clear also whether the Chinese side will abide by the previous production targets of the project, as its production capacity was to reach 2 billion cubic feet per day of natural gas, to be pumped into the Iranian domestic market beginning in 2021. In any case, the current deal seems to be producing satisfactory results for Iran, as it seeks to find international partners to develop the natural gas sector amid US sanctions, trying to develop the South Pars field in 18 phases in addition to six other phases to boost the production of the whole field.
On the other hand, the new agreement is a gain for the French company, which, after entering the Chinese company as a primary partner, can recover the amounts spent on the project before its withdrawal, which is estimated at $55 million, including management costs, engineering designs among others, but its losses would be huge, of course, given the high-yield investments in the Iranian market.
Various Messages
Through the acquisition of the development of phase 11 of the South Pars field by CNPC, China wants to send numerous political signals, especially to the US administration. The first is its commitment to continue its political and economic relationship with Iran despite the US sanctions on the latter. This message was underlined by Chinese Foreign Ministry spokesman Geng Shuang on November 27 that China will continue to cooperate with Iran in various fields, including the South Pars field project, characterizing these relationships as legitimate and legal.
This move coincides with China’s categorical refusal of the US withdrawal from the nuclear deal and the imposition of any unilateral sanctions, apparently among other factors that prompted the US to grant temporary waivers to eight countries, including China, to continue buying Iranian oil after the second batch of the US sanctions imposed on November 5.
Against that backdrop, the Chinese bank of Kunlun will be able to resume its activity with Iran, where it is expected to receive the proceeds of the sale of Iranian oil to China for later use to finance the import activities of Iranian companies, according to the Chairman of the Iranian-Chinese Joint Chamber of Commerce Asadollah Asgaroladi.
Secondly, China is seeking to exploit the tension of the US relations with some Middle Eastern countries to enhance its geopolitical and economic influence in the region. To that end, it has expressed is readiness to provide the necessary political, financial and technological support to such countries, especially Iran, at a time when many countries are cutting off their economic relations with Tehran. Thirdly, Beijing is keen to broaden the range of choices available in dealing with the souring relations with Washington, to reduce the pressure facing it.
Potential Difficulties
Putting the project into effect in the coming period rests on two major variables. The first is the extent to which CNPC can withstand the risks it may face due to its investments in Iran. If it does not get explicit US support for the project, it can incur billions in US fines, such as the previous US sanctions on other companies.
In addition, the Chinese company may be banned from conducting any commercial or investment transactions within the US, like the US trade ban that kept ZTE from doing business in the US market- which was lifted last August- because of providing US-origin products to Iran and other counties in clear violation of US laws.
The second relates to the possibility of the US administration stepping up its trade war against China because of its partnership with Iran, which will cause the Chinese side to suffer more massive losses than the profits of maintaining investments in the Iranian market.
Therefore, it can be argued that the foregoing factors will most likely drive the Chinese company to freeze its investment in the project in the foreseeable future, amid the current tension between China and the US, albeit it may take part in the project at a later stage once it obtains the US support for its implementation.
