China weighs Iran and Iraq risks for oil prize

Tehran, Nov 28: Hungry for oil and gas, China may take on political risks in Iran and security risks in Iraq to get a foothold where Western firms fear to tread.

Iran and Iraq together have 19 percent of global oil reserves and some of the world's biggest undeveloped fields.

China already gets almost half its oil imports from the Middle East, giving it a strong strategic incentive to secure big oil field deals in the two regional neighbours.

In Iran, Chinese firms are ''operating in an environment where there aren't a full range of competitors. They have the opportunity to get involved in super giant oil fields,'' said Ian Brown, head of the Middle East research team at Wood Mackenzie.

''In Iraq, whenever the time is ripe, it will be everyone and his dog competing and the chances of having a major share will be far less,'' Brown said.

Iran is heavily reliant on oil, which represents about 80 to 90 per cent of its export earnings. But its aged and declining oil fields mean it needs increased investment just to keep output at the present level of around 4 million barrels a day.

So Iran needs access to foreign money and technology, but US laws prohibit American firms from investing in the Islamic Republic.

Washington can impose penalties on firms from other countries investing more than 20 million dollar a year in oil and gas.

Contract disputes, delays, bureaucratic and political meddling, infrastructure problems and concessions oil firms say are unattractive have reduced foreign investment to a trickle.

The problem in Iraq is perhaps more intractable -- the daily toll of bombings, sectarian clashes and spiralling violence.

But Iraq has the third largest reserves in the world and only 10 percent of the country has been explored for oil.

Dozens of foreign oil companies have signed memoranda of understanding with Iraq, seen as a way of initiating relations with the new Baghdad government that could develop into real deals if and when stability is achieved.

But between April 2003 and June 2006, there were an estimated 315 attacks on Iraq's energy infrastructure and few foreign oil firms have started work on the ground.

Opportunities

To escape its bind, Iran has dangled the prospect of huge energy deals with China, which may be willing to accept less lucrative deals to attain energy security and which traditionally does not link investment with politics.

This strategy, if successful, ''would allow Iran to attract the investment, expertise and technology it desperately requires without undercutting its current domestic and political positions,'' said a report by consultancy PFC Energy.

For Iran, such deals might also help dissuade China from backing sanctions against Tehran over its nuclear programme. While UN Security Council negotiations over Iran sanctions drag on, so do Tehran's talks with China's Sinopec over its Yadavaran oil field, a rich prize which could be worth as much as 100 billion dollar.

What is given may also be taken away.

''If China agrees with sanctions on Iran, not only the government of the Islamic Republic, but also the people of Iran, would consider China an enemy of Iran and this may affect its political and economic cooperation,'' wrote Hossein Shariatmadari, an adviser to Iran's supreme leader.

China has yet to nail its colours to the mast as the United States pushes for a tougher sanctions draft against Iran and Russia argues for the European text to be watered down.

''Russia is the key player for Iran in terms of thwarting UN sanctions,'' said Mark Fitzpatrick of the International Institute of Strategic Studies in London.

China, he said ''will come in behind Russia. If Russia accepts stronger sanctions, China will not object. China's relations with the US are more important. Iran has to sell oil to someone and is not going to freeze China out of the market.'' Before the 2003 Iraq war, China had agreed a 700-million dollar deal with Saddam Hussein's government to develop the Ahdab oil field. Now that contract is being renegotiated and the new Iraqi government is keen to secure a deal with the Chinese.

''Their contacts with Iraq never stopped,'' said a senior Iraqi Oil Ministry official. ''They are the most active firms of all. They are on the ground with us and ready to offer all kinds of help to develop the oil sector.'' Chinese firms are ready to take a more relaxed view of the security risk to get in ahead of other international players.

''They are really competing with other companies to secure energy sources for themselves and so they are really assuming a higher risk and also even prepared to give better conditions,'' said Muhammad-Ali Zainy, senior energy economist and analyst at the British-based Centre for Global Energy Studies.

While Iraq is in such dire need of investment to repair the damage to its oil infrastructure from sanctions, war and looting, it is unlikely to fuss about the source.

''It is not wise to sideline anybody. The era of signing contracts based on our mood and relations is gone. The contracts will be given to those who are capable of doing the work,'' the Iraqi official said.

Reuters

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