CHINA/IRAN: $2 BILLION YADAVARAN OIL

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 007434 SIPDIS SIPDIS STATE FOR EAP/CM, NEA, EEB, AND INR STATE PLEASE PASS USTR TREASURY FOR OASIA/DOHNER USDOC FOR 4420 E.O. 12958: DECL: 12/10/2017 TAGS: ENRG PREL ECON EINV CH IR SUBJECT: CHINA/IRAN: $2 BILLION YADAVARAN OIL REF: A. BEIJING 3512 ¶B. BEIJING 6170 ¶C. OSC IAP 20071209950159 12/9/07 Classified By: ECON M/C ROB LUKE; REASONS: 1.4 (B/D) SUMMARY -------------- ¶1. (C) The Ministry of Foreign Affairs (MFA) confirmed media reports that China state-owned energy giant Sinopec sealed a deal with Iran to develop the Yadavaran oil field in Southwestern Iran. Media reports, some quoting officials at the signing ceremony that took place December 9, describe a seven-year, $2 billion buy-back arrangement (no equity stake) that commits Sinopec to bringing the field's production to 185,000 barrels of oil per day. Sinopec has previously insisted that the deal in the works would not result in actual "investment" but instead take the form of an "engineering services contract" as a way to suggest that activity at Yadavaran would not violate the Iran Sanctions Act (ISA). END SUMMARY A BIG DEAL -------------- ¶2. (C) Xu Wei, Deputy Director of the MFA West Asian and North African Affairs Department's Iran and Turkey Division confirmed December 10, based on his own discussions with Sinopec, that the Yadavaran deal has been concluded. He claimed his office knew nothing of the development until it was made public in the press that morning. Xu said he has not yet seen a copy of the contract and disavowed specific knowledge at present of the nature of the arrangement. When pressed, however, Xu insisted that Sinopec will provide services, but not investment, to Iran, and thus does not anticipate the deal will raise concerns under the Iran Sanctions Act (ISA). He added that the conclusion of the deal is unrelated to Foreign Minister Yang's recent trip to Tehran. ¶3. (U) The deal was reported without prominence in several Chinese-language newspapers. Xinhua wire service reports featured a photograph of the December 9 signing ceremony in Tehran that included Sinopec's Head of International Production and Exploration Zhou Baixiu and Iran's Deputy Oil Minister for International Affairs Hossein Noghrehkar Shirazi. The agreement to develop Yadavaran follows up years of protracted talks in the wake of a memorandum of understanding signed in 2004 between the parties to develop the field. The party on the Chinese side is China Petroleum Corporation, known as "Sinopec Group," the state-owned enterprise parent of China Petroleum and Chemical Corporation known as "Sinopec Corporation," a publicly traded firm listed in New York, Hong Kong, London, and Shanghai. Sinopec is China's number one producer of refined oil and petrochemical products and China's number two producer of crude oil. DEAL TERMS -------------- ¶4. (SBU) Embassy has requested a meeting with Sinopec to confirm the terms of the deal but today only received word from Sinopec that "we read about it in the news as well," followed by a commitment to follow up shortly. Media reports of the deal suggest the following: o The "initial estimation" of the deal's value is $2 billion; o Sinopec's work will be performed in two phases. Over the first four years, the firm will develop the field to produce 85,000 barrels per day. After three more years, the production will rise to 185,000 barrels per day; o a buy-back arrangement with a 14.98 percent rate of return; this implies Sinopec will not have an equity stake but will instead receive payment for the oil field's development, scheduled to take place over a seven-year period; o Sinopec must give 51 percent of subcontracts to Iranian companies; BEIJING 00007434 002 OF 002 o Some reports suggest Sinopec may also have committed to significant purchases over time of liquefied natural gas (LNG). IRANIAN COVERAGE -------------- ¶5. (U) The Voice of Iran, as translated by the Open Source Center (Ref C) featured Iranian Oil Minister Gholamhoseyn Nowzari emphasizing that the arrangement strengthens Iran's economic relations with China and suggesting that Iran is "witnessing the full presence of foreign investments in the country." The deal was also covered by Iranian media sources available online. SINOPEC'S PREVIOUS COMMENTS ON THIS DEAL -------------- ¶6. (C) In May 2007, Sinopec told us that it had been in negotiations with Iran for an extended period to perform contract work, with no plans for actual investment. The nature of any commitment would be for an "engineering services contract." They said Tehran may have been exaggerating the terms of a rumored deal for political ends (Ref A). ¶7. (C) In September 2007, Sinopec told us negotiations could result in a deal if several issues were resolved. They expressed understanding for U.S. concerns about a possible arrangement. They emphasized they were a responsible firm that complies with international laws and regulations. They said they had no plans for actual investment but instead were looking at an engineering services contract with a fixed rate of return. They commented that high oil prices showed a need for developing energy in Iran. (Ref B). RANDT