Before leaving China after a two-day visit to sign a raft of energy and chemical MOUs and agreements topped off by a US$70bn oil and gas deal with Sinopec, Iranian Oil Minister Bijan Namdar Zanganeh spoke to China Economic Review about fast-developing relations in the energy field between China and Iran, OPEC's second largest producer and the Mainland's biggest source of foreign oil. While China National Petroleum Corp (CNPC) and CITIC and other companies also figured in discussions, it was Sinopec which signed China's biggest energy deal to date, agreeing to help develop Iran's giant Yadavaran field and committing to buy 250m tons of liquefied natural gas (LNG) over 30 years. Zanganeh said he expects China will increase its LNG orders far beyond that. Excerpts:
Q: How does China fit in Iran's energy plans?
A: China is going to be the largest energy consumer in the world and any supplier cannot ignore China's growing energy consumption. For Iran, as the second largest oil producer in OPEC and as the second largest market in oil and gas reserves, it's very important to have China's market. We also have a very good market for services, especially in oil and gas field development, and that can be a good for Chinese firms. We basically agreed to gradually increase our oil exports to China and to sell 10mn tons of LNG per year and to embark on development of a huge, newly discovered oil field with Sinopec. That field can produce – based on our studies – 300,000 barrels of oil per day.
Q: What about your downstream petrochemical industries?
A: Another thing we basically agreed on was Chinese investment in a condensate refinery with a capacity of 360,000 barrels a day. CITIC will be an investor and Sinopec and CNPC will be operating partners along with an Iranian partner. The Chinese will hold 65%, Iran 35%. Petrochemicals are an important area for us – we are improving our production, which is now US$8bn a day, and we invited the Chinese to take a direct investment. It can be very good for Iranian petrochemicals and good for them because they get security of supply of raw materials for their industries. There are no limitations on investment. I am very optimistic Chinese will have a good investment in petrochemicals especially.
Q: When you look back, Iran has had difficulties with foreign investors in the past?
A: No, we have very good new legislation that supports direct investment. In oil and gas, we have a better situation than in other [countries]. We have signed many contracts in these last seven or eight years – with Total of France, Shell, ENI from Italy, Repsol from Spain, Sheer Energy from Canada, Inpex from Japan – based on the buy-back framework for oil and gas. Of course we have signed many other contracts with international companies from Japan, Korea, Europe, Canada, too, but these are not buy-back. Buy-back is very close to direct investment. It is based on the foreign company investing equity in Iran to build facilities and after completion, we start to repay, using production from the project. All responsibility during construction period of the project goes to the investor and after handover, we repay using only the output. For the investor buy-back offers a very good rate of return. We have signed contracts for oil and gas field development worth close to US$20bn in seven years – the Chinese won't be the first to sign on a buy-back basis.
Q: Where would you like to see Chinese investment?
A: China hasn't invested anything in petrochemicals but we are encouraging them to come to invest. We [ourselves] are investing a huge amount of money in downstream industries. Iran will become one of the biggest plastic, polymer and olefin producers in the world in the next five years – and the most sophisticated. We are looking at US$20bn [annual] production in polymers, aromatics and fertilizers. It needs US$20-25bn in total investment and we have invested close to US$12bn ourselves. I would say the Chinese are very eager and we expect them to come in – in aromatics and fertilizers at first.
Q: How will your crude exports to China grow, say five years from now?
A: Now we export close to 250,000 barrels a day to China and we are ready to increase it, but of course that depends partly on increasing our capacity from 4.2m barrels a day now to 5.2m barrels a day in the next five years – and China could be one of the best markets for our crude. For condensate and other gas products, we prefer to process these in Iran and then export the finished products.
Q: Can you talk about LNG – and what's happening so far as China is concerned?
A: We have discussed plans to produce 30m tons of LNG a year and we believe the best market for us because of [proximity] is Asia – India first, but also China, and after these markets, we'll look at Europe. Now, after long discussions, the Chinese accepted that we will have an annual 10m-ton LNG market in China – but we don't believe that is the final figure. We have received many proposals from Chinese companies, but because they are new to the market they should become familiar with the nature of the LNG market and infrastructure like reception terminals. We believe in the next five years we can have a much stronger situation for exports of LNG. Now we are starting at 10m tons. But I'm sure – we're sure – that will be increased vastly.
Q: Delivered by?
A: By tanker – we're in discussions now with the Chinese about a joint venture in energy transportation.
Q: The People's Bank of China recently made a small adjustment in interest rates and rising oil prices suddenly slipped. Ten years ago, few people outside China cared what the PBOC did with interest rates, but now the world is watching. Can you comment on that?
A: As you may have heard, there was an unexpected differential between the price of Iranian oil and Persian Gulf oil – and West Texas [Intermediate]. Usually, there is a small technical differential between our oil and West Texas/Brent crude – and there's a little differential for transportation – around 4% [altogether]. Now the differential between Dubai and Oman oil – and WTI – is close to 18%. The base calculation of the price for oil for China and Asia is Dubai and Oman, which means that Chinese and Japanese and others are receiving oil at less than US$40 a barrel when the price in the United States is more than US$56. It means there's an oversupply, especially in sour [sulfide heavy] crude and we think that increasing the interest rate will probably decrease speculation. The reason for the high price is speculation [over] political/military tension, and a technical shortage in refinery capacity in the United States.