Exclusive: China curbs Iran energy work

BEIJING Fri Sep 2, 2011 9:17am EDT

An Iranian oil worker on the Persian Gulf coast, in a file photo. REUTERS/Morteza Nikoubazl

An Iranian oil worker on the Persian Gulf coast, in a file photo.

Credit: Reuters/Morteza Nikoubazl

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BEIJING (Reuters) - China has put the brakes on oil and gas investments in Iran, drawing ire from Tehran over a pullback that officials and executives said reflected Beijing's efforts to appease Washington and avoid U.S. sanctions on its big energy firms.

The stakes are high for OPEC's second-largest producer, as China is one of the only powers on the international political stage capable of providing the billions of dollars of investment Tehran needs to maintain the capacity of its strategic oil sector.

Four energy executives in Beijing described retreats and slowdowns of Chinese ventures in Iran in recent months, even as China has bought more crude from its Middle East partner, which leans on Beijing for backing and investment to counter sanctions over its disputed nuclear plans.

The slowing of China's energy investments in Iran was prompted, at least partly, by Beijing's efforts since late 2010 to ease tension with the Obama administration and cut the risk of Chinese oil firms being hit by U.S. sanctions that Congress has vigorously backed, said officials.

President Barack Obama and key members of his cabinet have pressed Beijing to do more to help rein in Iran's nuclear activities, and Vice President Joe Biden raised the issue during his recent visit to China, White House spokeswoman Caitlin Hayden told Reuters.

Obama, Biden and Secretary of State Hillary Clinton "all have stressed the need for continued Chinese restraint in investing in Iran's energy sector, by slowing down existing activities and by not concluding any new deals," said Hayden.

U.S. officials have literally come knocking at the doors of Chinese energy executives, one of the executives said.

"The Chinese are quietly taking credit with U.S. officials for being cooperative" on Iran, a senior U.S. Congressional aide who closely follows U.S.-China relations told Reuters.

"I really date it back to mid-to-late 2010, when they began to signal to us very clearly: 'We can't say it publicly, but you will notice that we're not proceeding with these new contracts,'" said the aide, who spoke on condition of anonymity, citing the sensitivity of diplomacy with China.

Tehran has noticed and has warned Chinese firms they need to make progress on energy projects. U.S. pressure appears to have compounded commercial tension over the terms of Chinese energy investments in Iran, and those strains have grown this year.

There are no signs China will risk rupturing its relationship with Tehran, but ties could become testier and harder to manage.

Beijing has worked to ensure United Nations sanctions on Iran do not imperil its energy investments and oil and gas purchases. But unilateral U.S. sanctions could be invoked to punish Chinese firms with operations in the United States for their work in Iran. The Obama administration has avoided taking that step, mindful that such a move is likely to anger Beijing.

Western powers believe Iran is using its nuclear program as a means to build weapons. Tehran says it needs nuclear-generated electricity.

DOUBLE WARNING FOR CNPC

Since June, CNPC, China's biggest state oil and gas group, was twice warned by its Iranian counterpart to speed up work at the giant South Pars natural gas field or risk losing the multi-billion-dollar deal, Iranian media have reported.

CNPC has delayed drilling exploration wells since it signed a $4.7 billion deal to develop phase 11 of South Pars in 2010.

The warnings to CNPC came after China's third largest energy firm CNOOC pulled its team from Iran's North Pars gas venture, two Chinese executives said. In late 2010, CNOOC was told by the Chinese government to stop work at the project, one said. The Chinese industry officials all spoke on condition of anonymity.

Company spokesmen declined to answer Iran-related questions.

China's second-largest oil and gas firm Sinopec Group, which Beijing-based oil sources said has done more work on the ground than the other two, has delayed the start date of the $2 billion Yadavaran oil development.

Those moves could also reflect Chinese unhappiness with business hardships in Iran. International oil firms have long seen the terms of Iran's contracts as unattractive. One Chinese executive described the Iranians as "tough negotiators."

But observers said an understanding between Washington and Beijing encouraged Chinese firms to slow down the Iran projects, reinforcing commercial reasons for doing so.

"My understanding is that there was a tacit agreement reached between the two countries, so that Chinese companies active in Iran would not undertake new investments -- specifically, they would not backfill -- and in return the U.S. would not sanction them for prior investments," said Erica Downs, a Brookings Institution expert on Chinese energy companies. Backfilling refers to firms jumping in to take over projects abandoned by rivals.

Chinese companies apparently hope they can keep their presence in Iran at "Goldilocks" temperature: neither too cold to risk a break, nor so warm as to risk sanctions from Washington, where Congress last year pushed through tougher potential penalties on companies that do business with Iran.

Downs, a former energy analyst for the CIA, said Chinese firms were playing for the longer term, biding time so they could be among those first in line when Iran opened back up.

KNOCK KNOCK, SANCTIONS MAN CALLING

Iran's other big Asian customers have cut back oil imports or are in payment disputes with Tehran. But China's slowdown in investment and work at Iran's fields have not been accompanied by any slowdown in the flow of crude.

Instead, it has bought more. The volume of imports in the first seven months of 2011 rose almost half on the year. At nearly 560,000 barrels per day, the flow was about a quarter of Iran's crude exports and is worth some $20 billion a year.

China refining giant Sinopec has lined up a new import deal for 90,000 barrels per day of condensate, a super light crude oil, this year, boosting China's Iranian oil buys to new peaks.

The Obama administration has probably not explicitly raised the threat of using unilateral sanctions against Chinese firms working on Iran's oil and gas fields, said the Congressional aide. The implied risk could well have encouraged Beijing to be more accommodating to U.S. pressure on Iran, he said.

U.S. officials have taken their case directly to Chinese oil companies, going beyond the usual channel of dealing with China's foreign ministry, said a senior Chinese oil executive and a Beijing-based researcher, who spoke on condition of anonymity.

"He flew twice from Washington to talk to me in my Beijing office," the executive said of a U.S. sanctions official he met. "Whatever we do in Iran, the Americans were watching."

U.S. officials lobbying Chinese firms included Robert Einhorn, State Department special adviser for non-proliferation and arms control who helps steer policy over the Iran nuclear dispute, the researcher said.

"China places a high priority on energy security," Einhorn told a seminar held by the Arms Control Association in Washington D.C. in March, according to a transcript on its website (www.armscontrol.org).

"But we believe, for whatever reasons, they have exercised voluntary restraint. They've adopted what we call a 'go-slow' approach," Einhorn said of Chinese energy investments in Iran.

Chinese oil companies have felt direct pressure from their own government, which has sought to steady ties with Washington after a chain of disputes in the first half of 2010 over Internet policy, Taiwan, Tibet and other regional issues.

Until later in 2010, Beijing shunned U.S. requests to rein in energy investment in Iran, said the congressional aide. But that changed, echoing a broader Chinese effort to douse down tensions with Washington. "They have essentially put out the word, 'Hold off'," he said.

"The thing that I can tell you for certain is that the Chinese are taking credit for their restraint," he said.

Many U.S. lawmakers believe Beijing has not done enough to curtail ties with Iran. New legislation could increase pressure on the Obama administration to punish Chinese energy firms, said Mark Dubowitz, executive director of the Foundation for Defense of Democracies, a Washington D.C.-based institute that favors stronger sanctions against Iran.

Moving into an election year, he said, "the administration will not want to be seen to be weak on this issue."

(Additional reporting by Arshad Mohammed and Jeff Mason in WASHINGTON; Editing by Brian Rhoads)

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