Iran’s oil fields, Chinese scant progress

Seyed Hamid Hosseini talks about the history and future of Iran China oil relations

It is not possible to fully describe all the aspects of Iran China relations in one short interview; the Chinese are present at various segments of Iran's oil industry from machinery and equipment supply to financing, upstream and downstream. We decided to talk with Seyed Hamid Hosseini member of the Tehran Chamber of Commerce about the experience and the future prospects of our relations with China. He believes that China has not been successful in upstream sector but in refining and petrochemical industry we are able to benefit from their presence. Mr. Hosseini believes that return of Iranian frozen assets through financing national projects and setting up joint ventures could strengthen Iran - China oil relations.



As our first question … what is your overall assessment of Chinese contractors compared to others?
In general, there are three types of countries: resource dependant countries in which agriculture and mining are the main industries, countries which depend on performance where resources turn into commodities, and technology/ innovation dependant countries. Iran is in the second group. Technical knowledge and innovation is crucial to our oil and gas industry. Horizontal and directional drilling in ultra-heavy oil fields is highly scientific.
After the imposed sanctions we tried to replace our partners; countries such as India, Venezuela, Angola, Malaysia, Indonesia and China signed contracts. I can even mention Belarus. Almost all these countries left Iran due to the sanctions on provision of financing and import of technical knowledge. China was the only country that insisted on staying in Iran and providing our industry with technical and financial assistance. They started with West Karoon and Azadegan oil fields. We had the potential of producing 1 million barrels a day in that zone and we counted on the Chinese and signed a contract with them. Unfortunately, no substantial progress was made. We cannot say that they did not have the technical knowledge of land drilling or the financial resources. They were even able to utilize technical knowledge of other companies. It seems that it had other underlying reasons they were looking for an excuse to leave and finally we stepped in by ourselves.

Was it a mutual interdependence? Do the Chinese need our markets?
China is currently a major investor in oil industry all over the world. Their investments exceed those of Middle Eastern countries with an annual foreign investment of about $ 50 billion in countries such as Sudan, Mozambique, Angola, Venezuela, Kazakhstan, Turkmenistan, Iraq and even Europe, Mexico and the US. In this way they actually secure their energy supply. The Chinese are present at many countries and consortiums. China has an annual excess reserve of 200 to 300 billion dollars and prefers to invest it out. There were political factors for their presence in Iran. After the increase of sanctions' pressure on Chinese oil companies they decided to stay in Iran through only one of their companies and, consequently, they did not do much of a work in Azadegan oil field while Iraq produces 210000 barrels in the same field.

Studying Iran-China oil relations, we come up with this question; with a history twice as longer than theirs, why have not we been able to have such oil companies?
Firstly, China does not have one state-owned oil company; there are several competitors. Its economy is linked to the global economy. They realized that the key to economic growth is global presence. As a result, they thought globally and established joint ventures with international companies. In the past our National Oil Company had the same capabilities, we built refinery plants in many countries. Several years ago, one of Stat Oil consultants was here for a conference. He was in Iran to be trained 50 years ago! He was surprised that we now need him in Iran. It seems that we have not been able to keep up with the pace of changes in the world. Many countries turned their state owned national oil companies into international ones.
Not only did we not decentralize but also centralized our oil industry and this strategy prevented NIOC from entering the global markets and, despite our background, we are currently behind many countries.
Many of the Chinese are currently studying in the US and Europe. If I were the Minister of Oil, I would send our top 100 students to continue their studies on scholarship in foreign countries.

Let's get back to the topic, there has not been a significant progress in upstream sector. On the other hand, there are some projects in refinery and petrochemical industry with the Chinese participation. What do you think about the downstream sector progress?
Their performance in downstream sector is acceptable. We have purchased the technical knowledge and they did the field studies, the licenses are purchased from European firms so we mostly need financing and equipment. The Chinese and Iranian contractors cooperated in Arak and Isfahan refineries.
As for petrochemical industry, it seems that they are more advanced. They have been able to produce methanol from coal and polyethylene from methanol. They have a deeper product chain than we do. They buy our Methanol, Paraxylene, and Orthoxylene and our liquids. Unfortunately we are not capable of refining these products.

Can we use our frozen assets in China to finance our national oil projects?
We did have a discussion about $22 billion of our assets which is currently in a Chinese bank to finance some projects and keep the money as deposit in the bank. It has not happened so far due to the costs of financing and managerial costs. There has been a turnaround in conditions and Iran's Bank of Industry and Mine (BIM) has started financing several projects, two steel plants and one petrochemical project. Iran started construction of Masjed Soleyman Petrochemical Complex with $450 million of investment.
After the new report on Iran from International Monetary Fund which forecast growth for the economy, Iran's Central Bank had a series of negotiations with the Chinese and announced that the investments must exceed the $22 billion at least twice as much or triple the value of Iran's frozen assets in China and it was not turned down by the Chinese side. They agreed to fund $22 billion in Iran's projects in the first step and promised to double or triple their investments. Of course it depends on nuclear talks with 5+1. In case of reaching a comprehensive agreement, the Chinese would be willing to invest even five times more than the initial investment and at that time we can decide whether to put all of our eggs in China's basket or not.

As our last question I'd like to ask you about oil equipment supply, from oil drilling rigs to other equipments in oil and gas industry. Some believe that importing rigs from China put Iranian manufacturers out of business. What is your stand on this matter?
Chinese helped us with the water well drilling rigs. Although the structure and the arms were made in China, they agreed on using European components and hydraulic jacks. They helped us in both drilling rigs and cranes. It was a pilot scheme for Chinese companies which could be extended to other countries and we took our advantage. It has been said that with Iranian suppliers we do not need to import rigs for land drilling. On the other hand, top Iranian oil executives have warned the contractors over project delay. For example, it took 10 years after the LC issuance in 1384 Iranian calendar year (2005) to deliver a ship by Khalij Fars Shipyard Company. According to officials, the solution would be cooperation between Iranian manufacturers and foreign companies. For example, the Chinese should be obliged to use Iranian components and this would be a precondition for purchasing say 6 out of 10 of the total parts from them. We had the same experience with Siemens turbines. By obliging them to assemble in Iran, we are now self-sufficient in turbine industry. We need to go through the same path in oil and gas industry.