August 04,2009

CNPC Drilling its Way into Middle East Oil/Gas Fields

By CSC staff, Shanghai

After winning the bid to operate in Iraq's Rumaila Oil Field, which holds 15% of that country's proven oil reserves, China National Petroleum Corporation (CNPC) is now preparing to go to work in one of Iran's largest onshore oil fields.

Iran's Ministry of Petroleum declared on August 3 that CNPC had signed a memorandum of understanding (MoU) with the National Iranian Oil Company (NIOC), in which CNPC promised to pay 90% of the development costs of South Azadegan Oil Field, and would take a 70% stake in the project. The oil field is one of Iran's largest onshore oil fields, as well as one of the world's largest finds in the past 30 years according to proven reserves.

Just two months ago, CNPC took over Total's equity in a gas field in South Pars, an off-shore field shared between Iran and Qatar, and become the developer of the project. The gas field is not only the largest in Iran, but also the largest in the world.

Including the deal for the Rumaila Oil Field, whose oil production will account for 74% of China's total in future, within two months, CNPC has been involved in three world level projects in the Middle East.

South Azadegan Oil Field was originally worked by a Japanese oil company. In February 2004, the International Petroleum Development Corporation, in which the Japanese government took a 36% stake, signed an oil field development agreement with NIOC, according to which the company would get 75% of exploitation rights in the field.

According to the original plan the oil field was to begin to produce in 2005 to 2006. However, due to pressure from the US and the company's doubt about profits, the project was put aside.

The MoU between CNPC and NOIC is a preliminary agreement only, and there are still many uncertainties. Compared with the Japanese company, however, CNPC enjoys big advantages.

Iran's Vice-Minister of Petroleum Shahnazi Zadeh, who is also chairman of the National Iranian Oil Refining and Distribution Company, said during his visit to China in July that due to the financial crisis, Iran's economy had been hit quite hard at the beginning of 2009. To help out, the Chinese government is importing more oil from Iran, and has offered economic aid.

China's three oil companies have long been looking for business with Iran. Sinopec began to reform Iranian refineries in 2001, and signed an agreement with the Iranian government two years ago on the joint development of Yadavaran Oil Field, though as yet no detailed scheme has been formulated for the agreement. CNOOC's negotiation with Iran on natural gas fields in the northern Persian Gulf ended up in failure.

Since China offered economic aid to Iran, though, Chinese oil companies, especially CNPC, have been making rapid progress in negotiations. "When you have good relations with the government, they will talk with you privately, and this is better for us than publicly invited bids," said a CNPC insider to 21 Century Business Herald.

Previously, the Middle East had not been an important area for CNPC's overseas business, but now, according to the company's plan at the beginning of the year, it aims to increase production in this area to 30 million tons a year within 8 to 10 years, while its annual oil production goal for the Middle Asia, Africa, and South America will be 50 million tons a year.

The Middle East is traditionally the territory of western oil companies, and most of the oil fields have already been exploited. Also, most of the countries in this area are quite rich, and are not so eager for funds, as are countries in Africa. However, the financial crisis is offering Chinese companies opportunities to develop business in the area. Middle East projects now occupy the largest share of CNPC's plan for overseas expansion this year.

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