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Iran: Energy Ties To China Puzzling

Boston, 20 September 1999 (RFE/RL) -- Analysts are puzzled by Iran's persistence in relying on China to build a critical pipeline for Central Asian oil.

On Wednesday, Iran announced that it has opened talks with a consortium of Chinese companies to build a 392-kilometer pipeline from the Caspian port of Neka to its major refinery at Tehran.

The line is intended to handle oil swaps from Kazakhstan and Turkmenistan, but the project has already suffered from long delays. Under a previous agreement with the Iran Power Management Company, known as MAPNA, construction was to have started by last March. The deal fell though when MAPNA was unable to secure financing, Deputy Oil Minister Ali Majedi said.

Last February, more than a month after a deadline for a deal with China had passed, MAPNA turned to European companies in hopes of forming a partnership. Since then, little apparent progress has been made. Now Iran is turning back to the Chinese companies, which are said to include China National Petroleum and the China Petrochemical Corporation, known as SINOPEC.

The delay could endanger Iran's plans to provide a major export route for Caspian Sea oil. Tehran has argued that the Caspian does not need a main export pipeline to the west because Iran can use up to 750,000 barrels of oil per day for its local refining. It would export the same amount of Iranian crude through the Persian Gulf to pay the Central Asian nations, while adding a charge for the swaps.

Iran has been swapping small amounts of crude with Kazakhstan and Turkmenistan for over a year, but the results have been largely disappointing. Larger volumes could be moved to the refinery through a pipeline, which could eventually be extended all the way to the Gulf.

But the choice of China for the project is curious in light of Beijing's poor record of keeping its investment pledges. Two years ago, China signed a series of oil development and pipeline deals with Kazakhstan that were valued at $9.5 billion. It is unclear whether any of them has been realized.

China was to have built a 3,000-kilometer pipeline to link its network with Kazakhstan's Uzen oilfield, the country's second largest. In July, Kazakhstan complained that the project was going nowhere and did not appear feasible because of depressed oil prices. Chinese officials claimed they were actually speeding up the construction. But last month, China National Petroleum admitted that it was shelving the pipeline due to low returns.

Time may be crucial to Iran's case that it is a credible option to the planned Baku-Ceyhan pipeline. Iranian officials began their campaign three years ago to convince oil companies that swaps would be a preferable solution for Caspian exports. If the Neka-Tehran pipeline had at least been started, it might have competed with the Baku-Ceyhan scheme, which has also been stalled.

Iranian officials now say the Neka line will cost $360 million, compared with at least $2.4 billion for Baku-Ceyhan. Given the advantage, it is all the more remarkable that Iran has let time slip away.

Analysts have struggled to understand why Iran has tied its fortunes to China, despite the fact that it has been so undependable. A year ago, experts speculated that Iran may have been trying to spread the risk of possible U.S. sanctions against the pipeline by tying itself to a permanent U.N. Security Council member and a top trading partner of the United States.

But the risk of sanctions has faded dramatically since May 1998, when President Bill Clinton waived sanctions against European, Russian and Malaysian firms for their petroleum investments in Iran. To date, the U.S. penalties under the 1996 Iran-Libya Sanctions Act have never been imposed.

Iran may also have had visions of an alignment with China that would surround Central Asia's resources on two fronts. If so, the strategy has taken too long to succeed.

The leading theory now is that Iran has been unable to find the guaranteed volumes of Central Asian oil that would justify its swap line. Total oil production in Turkmenistan has only recently reached the level of 146,000 barrels per day. Iran can only look to the greater output of Kazakhstan, where China has development rights through its agreements.

Swapped oil so far is believed to have come from Kazakhstan's share of its giant Tengiz field, where the major investor is Chevron Corp., a U.S. firm that cannot ship oil to Iran. U.S.-based Mobil Corp. has already been denied a license for swaps from its oil projects in Turkmenistan.

The restrictions may leave Iran with few choices for its pipeline, which is planned to carry 370,000 barrels of oil per day. But there also seems little doubt that Iran has played its hand badly and squandered any advantage it had.

Analysts say that if Iran had reallocated its resources to build the pipeline itself, it might have had a competitive project already well under way. Instead, Kazakhstan has turned to Russia for greater export access to its pipelines and has recently courted Ukraine in hopes of finding more export capacity.