By staff reporters Yu Min and Yang Yue

An oil field agreement between China’s petroleum giant Sinopec and the Iranian government not only represents the first Persian-style buyback model for a Chinese company, but also shows how compromise and persistence can yield results when dealing with Tehran.

The estimated US＄ 2 billion deal to tap the Yadavaran oil field was signed December 10 by Zhou Baixiu, general manager of Sinopec International Exploration Co., and Hossein Noghrehkar Shirazi, Iran’s deputy oil minister. It’s one of the largest foreign deals for Iran in recent years.

The contract was finalized in Tehran after years of negotiations and over objections from the United States.

One of the world’s largest undeveloped oil fields, Yadavaran is in southwestern Iran’s Khuzestan, near the Iraqi border. Its 675 square kilometers hold proven reserves of 18 billion barrels.

The project’s initial phase calls for raising production to 85,000 barrels a day within four years. A second phase would add 100,000 barrels a day in three years.

Nozari said the final cost would be determined after contractors are hired, but an initial estimate pegged the project at US ＄2 billion.

NIOC’s legal affairs manager said the project will kick off soon, with Iranians handling 51 percent of the work and filling half the job slots.

Under Iran’s buyback model for upstream oil and gas projects, a foreign investor develops a designated field according to a previously agreed budget, and then hands over the facility to Iran in exchange for a reimbursement after production starts. The reimbursement is based on a set profit margin, with proceeds from the field’s output spread over time.

Nozari said negotiators agreed to set Sinopec’s reimbursement rate at 14.98 percent – slightly less than Sinopec’s 15 percent target but still above the 13 to 14 percent range sought by the Iranian government.

The compromise represented a symbolic adjustment, said Yin Gang, a researcher at the West Asia and Africa Institute of China’s Academy of Social Sciences. The deal is good for China, he said, but Iran is benefiting most from its self-designed buyback model. Yin said the deal reflected the “smart and persistent” style of Persian business.

But Tehran did not give ground in every area. For example, Sinopec planned to develop the field “for possible higher returns,” said a spokesperson for the Chinese company’s international exploration division. But NIOC “did not agree.”

“It’s a service contract, not a product-sharing contract, neither an investment, nor a development contract,” the spokesperson said. “We’re the builder and financier. When the oil field’s output reaches a certain level, we’ll get our reimbursement based on the agreed percentage.”

Sinopec’s effort to extend its reach into Iran dates back to 2003. A year later, a memorandum of understanding with NIOC was signed by Ma Kai, director of the China National Development and Reform Commission, giving Sinopec a 51 percent stake in developing Yadavaran with the goal of producing 300,000 barrels of crude daily, and buying 10 million tons of liquefied natural gas (LNG) annually over a 25- to 30-year period.

Caijing was told in 2006 by Mou Shuling, board secretary of Sinopec Shareholding Co., that Ma was expected to sign a Yadavaran deal during his trip to Iran early that year. But Mou’s statement was quickly denied by a Chinese foreign ministry spokesperson.

Further negotiations prompted Iran in early 2006 to modify its terms to allow foreign investor involvement during a project’s production phase, lengthen the reimbursement period, and let investors share fruits of any above-target production as well as penalties for any shortfalls. 

Yet the apparent stalemate in 2006 was also linked to escalating international concern over Iran’s nuclear program and sanctions imposed by the U.S. government. Foreign investors were quite cautious about Iran.

The U.N. Security Council passed a resolution in December 2006 to impose a series of sanctions against Iran, declaring that member countries should “prevent the supply, sale or transfer, for the use by or benefit of Iran, of related equipment and technology.”

Later, Washington announced sanctions against 24 foreign companies and individuals suspected of weapons deals with Iran and Syria – including three Chinese companies. But while the U.S. embargo affected American investment in the Iranian oil and gas sectors, nothing in the U.N. resolution barred China from investing in Iranian oil projects.
Nevertheless, Washington said it was “disappointed” by the Yadavaran deal.

"Major new deals with Iran, particularly ones like these involving investment in oil and gas, really undermine international efforts to pressure the Iranians to comply with obligations already in place under the U.N. Security Council resolutions,” said Robert Rains, spokesman for the U.S. embassy in Beijing.

Financing issues also slowed Sinopec’s ambitions. U.S. pressure against international banks operating in Iran, rising costs and inflexible contract terms were considered key reasons for a slowdown in foreign investment in Iran’s oil and gas industry. There were even reports that Chinese banks were increasingly wary about extending credit to Chinese exporters with Iranian clients.

Yet Yadavaran is not the only oil deal between China and Iran. For example, China National Offshore Oil Corp. and NIOC have agreed to develop the South Pars gas and oil reservoir and build an LNG plant. And in December 2006, China National Petroleum Corp. signed an agreement with NIOC for 3 million tons of LNG.