Iran and China exploit Saudi weakness with new oil megaproject
Iran and China capitalize on Saudi weakness with new oil projects
Iran and China to exploit Saudi oil deficit with new projects
Iran intends to steal oil contracts from Saudi Arabia with new projects
Iran prepares to gain share in the Saudi market through new oil projects
Iran prepares to acquire Saudi market share
Iran intends to make an aggressive move on participation in the Saudi oil market
Iran has seriously sought to contract major oil supply contracts from Saudi Arabia since the Tehran-backed Houthi attacks on two of the UK’s main oil facilities on September 14, 2019, especially for coveted Asian customers. Following Saudi Arabia’s decision to unilaterally cut one million barrels per day (bpd) below its most recent OPEC + quota originally set last month, Tehran announced last week that the National Iranian Oil Company (NIOC) has signed $ 1 , 2 billion in contracts for eight new projects designed to significantly increase its crude oil production. Although these projects are largely managed by Iranian companies, they are part of a patchwork of projects that were formulated in conjunction with the 25-year agreement made with China in 2019, which will feature many Chinese companies working on a ‘only contract. ‘base, although many contracts in all business sectors in all fields.
When Iran’s Foreign Minister Mohammad Zarif visited his Chinese counterpart Wang Li in August 2019 to present his Chinese hosts with a roadmap on the comprehensive China-Iran strategic partnership that had originally been signed in 2016, a dramatic phased escalation, the 2016 initial framework for strategic cooperation was agreed. In turn, Iran would give a number of beneficial terms to China, starting by giving Chinese companies the first option to bid on any development of oil fields (and gas) new or paralyzed or incomplete. China should also have the right to purchase any and all oil production (gas and petchems) with a guaranteed minimum discount of 12 percent on the six-month moving average price of comparable reference products, plus another 6 to 8 percent this metric for risk-adjusted compensation. Also critically, China was allowed to pay for all oil products (and gas and petchems) in the soft currencies it accumulated when doing business in Africa and the states of the former Soviet Union, which effectively gave China an additional discount of up to 12 percent, giving a total discount of about 32 percent to China on all purchases of petroleum gas and petchems. Related: UAE oil turns to hydrogen
In turn, China’s main commitment to oil – in addition to its main political commitment to support Iran in the UN Security Council (in which it has one of only five Permanent Member votes, with Russia, France, the United States and United Kingdom being the others) – was to increase crude oil production from the West Karoun oil field cluster in Iran. At that time, the West Karoun fields – which include the huge oil reservoirs of South and North Azadegan, South and North Yaran and Yadavaran, among other lesser-known locations – were together producing about 355,000 bpd of oil alone, based on a rate recovery across the West Karoun oil region of between 3.5 and 5.5 percent only. According to the Iranian Petroleum Ministry, each 1 percent increase in the recovery rate for West Karoun fields will increase recoverable reserves by 670 million barrels, or $ 33.5 billion in additional oil revenues from an average of $ 50 a barrel. Given that the average extraction cost per barrel of crude oil in Iran is almost exactly the same as in Saudi Arabia, $ 1-2 per barrel, there is no reason why recovery rates in each country should not be almost exactly the same. same well, instead of the average of 4% or more in Iran and the current average of 50% in Saudi Arabia (with realistic plans to increase it to at least 70%). It was decided between Zarif and Wang in August 2019 that Chinese companies would increase West Karoun’s production of 355,000 bpd by another 145,000 bpd in the first phase (to 500,000 bpd) and then by another 500,000 bpd (to 1 million bpd).
It was around that point, however, that the rhetoric of trade war began to be escalated by former U.S. President Donald Trump, along with a consistent increase in sanctions against Iran and those negotiating with him after the unilateral withdrawal from the U.S. of the Joint Global Action Plan in 2018. This also meant that China felt it should act more smoothly in its dealings with Iran, but that its help was more needed than ever. A year after the withdrawal of the US from JCPOA, OilPrice.com uniquely highlighted Iran’s true economic numbers, which would be an unpleasant read if you were Iranian. Using a comparison benchmark from November 2019, from May / June 2020, Iran’s GDP growth was minus 22 percent, unemployment was around 37 percent, inflation was over 65 percent cent and the rial depreciated at least 65 percent over that period against a basket of major global currencies. Iran also currently had an 80% budget deficit and a negative trade balance of $ 6.5 billion. Related: Saudi Arabian production cut increases demand for Russian oil from the Urals
As a product of this dynamic, two peculiar types of discreet ads began to appear in relation to new developments in Iran (and also in Iran sponsored by Iraq). The first involved extremely high-cost projects being advertised in Iran, disconcerting given the fact that it was technically bankrupt, and the second mentioned the new ‘contract-only’ involvement of several companies, all of them Chinese. Two important examples of this new type of announcement were made in July 2020, both relating to the development of supergiant camps in the West Karoun region. The second announcement – the largest – came from Iran’s Ministry of Petroleum that it had awarded a $ 1.3 billion development agreement for more than double oil production in the South Azadegan field, while the second oil signed that month was a $ 300 million contract for the Yaran oil site. The reality of the situation was that several Chinese companies had received 11 “contract only” projects in a number of operational areas for the development of the South Azadegan oil field in Iran, including contracts for drilling only, field maintenance only, engineering only, just construction and just technology, among others. Another indicator of what is really happening to South Azadegan is that the supposed Iranian main partner in South Azadegan – Petropars – was also the partner at that time of China National Petroleum Corporation in the stagnant Phase 11 project of the supergiant South Pars non-gas field. associated natural. “In reality, it makes no difference to the name of the contract available to the public, China is just moving ahead with what has already been agreed,” said a senior source in the oil and gas industry in Iran exclusively. OilPrice.com at the time.
In exactly the same vein, it does not matter the name of the funding for the projects announced last week to boost oil production in West Karoun, as all the money Iran needs to achieve the goals agreed in the 25-year agreement with China and Beijing will be happy to supply them, considering how irreplaceable Iran is in its global multigenerational balance of power by changing the ‘One Belt, One Road’ plan. It is true that Iran’s Petroleum Minister, Bijan Zanganeh, said last week that oil projects will be financed by issuing bonds, but it is equally true that any of those bonds that are not readily bought on the markets will be bought by Chinese or Chinese- related entities. In fact, as reported exclusively by OilPrice.com in October 2019, it was China that agreed with Iran to act as a support offer for a new type of security that would be an issue denominated in Iranian rials, but – crucially for potential foreign buyers – carrying with them the option of not only being redeemed in rials, but also in a variety of more conventional currencies at the spot rate of the day the buyer decided to redeem the paper. Although the full range of currencies has not yet been finalized, they preliminarily included the Chinese renminbi and the Russian ruble, as well as euros, Japanese yen and Swiss francs.
Furthermore, again as highlighted exclusively by OilPrice.com, May 2020 saw a small and tedious announcement of the ratification of a statute related to the issue of securities on websites affiliated with the Iranian government that was ignored by the rest of the international media in the world. However, the blank statement that Iran’s first vice president, Eshaq Jahangiri, approved the issuance of Islamic bonds in the 1399 calendar year (which started on March 20, 2020) meant that Iran would have access to a new massive flow of capital it would use to boost its oil and gas development program. All of this, OilPrice.com highlighted at the time, would be owned by China and that is exactly what NIOC managing director Masoud Karbasian alluded to last week when talking about having sold IRR30 trillion (US $ 712.5 million) of bonds to finance new projects with plans to issue at least another IRR 20 trillion more in the near future, if necessary.
By Simon Watkins for Oilprice.com
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