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Turmoil turns Iran's energy sector to Beijing

Political upheaval in Iran will hamper the country's beleaguered oil and gas industries, energy experts say, and encourage Tehran to look to China for investment.

Iran's oil and gas sectors were suffering from a lack of investment before the dispute over last month's election because most western operators were wary of engagement. But disquiet following the re-election of Mahmoud Ahmadi-Nejad as president, dismissed as fraud by Mir-Hossein Moussavi, his challenger, has exacerbated that fear.

"Western companies and international oil companies are waiting to see what happens next, especially as there is talk of more sanctions," said Julia Nanay, a senior director at PFC Energy, the consultancy.

Businesses were hoping the Obama administration, with its talk of engagement, would usher in an era of improved ties, paving the way for investment in the second largest holder of oil and gas reserves.

However, concern about the election and the heavy-handed response to the ensuing protests have damped those hopes.

"The question of whether the US-Iran dialogue is going to move forward is probably going to cause a slowdown in activity, certainly on the part of the western [international oil companies]," said Ms Nanay.

European oil majors such as Total , Royal Dutch Shell , Repsol and Statoil have delayed plans to develop parts of South Pars, the world's biggest gas field, because of US sanctions, leading Iran to turn more frequently to China.

Most recently, the National Iranian Oil Company cancelled a deal with Total of France and signed a $4.7bn (€3.3bn, £2.9bn) contract with the Chinese National Petroleum Company to develop phase 11 of South Pars.

The South China Morning Post has reported that Iran invited Chinese companies to take part in several oil projects worth more than $42.8bn, citing Iran's petroleum ministry.

Even before the turmoil, Iran signalled it had tired of western foot-dragging and was likely to favour Chinese oil companies.

"They [European companies] did not want to cut their relations with us despite tremendous pressure from [George W.] Bush," Hojjatollah Ghanimifard, Nioc's vice-president for investment affairs, said the day before the election.

"We understood, but this does not give them the right to make us wait for ever. When we realised this would hurt our national interests, we turned to very good and reliable counterparts who have been working with us over the last few years," he said, referring to a small gas field China helped develop.

"We understand that we have to diversify the counterparts that we used to have in order to be on the safe side," Mr Ghanimifard said.

Even if European companies felt able to press ahead with investment in Iran, the Nioc had learned its lesson, he said.

"This will not change our mind on how we are going to deal with our European or new Asian counterparts. As soon as negotiations [with the US] start, it doesn't mean our negotiations [with new counterparts] will stop or that it should give new hopes for our old counterparts," Mr Ghanimifard said.

But Greg Priddy, an oil analyst at the Eurasia Group consultancy, said Chinese companies did not have the same expertise as more established European operators.

"Iran was already looking to companies like Sinopec and CNPC, which are doing onshore work which is technologically much easier," Mr Priddy said, but he added that those companies would not be able to do the more difficult offshore development needed for South Pars.

That meant Iran's gas reserves were unlikely to be developed, regardless of whether Chinese companies became more active. "Unless there is some kind of breakthrough in the next year, it's just going to be more of the same," Mr Priddy said.

Throughout, the Nioc, like Mr Ahmadi-Nejad, has been defiant, saying no international operator could afford to ignore Iran.

"Our dear friends in Saudi Arabia are first in oil but they don't have gas. Our dear friends in Russia have a tremendous amount of gas but they don't have the oil that we have," Mr Ghanimifard said.

"No matter what technology and what money the major oil companies have, if they do not have access to oil and gas they will be like a bank that has no money, a research centre with access to no technology."

By Anna Fifield

© Financial Times 2009