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Iran: Oil Deal With China May Have Hit A Snag

Iran is celebrating President Mohammed Khatami's visit to China this week, but one of Beijing's biggest investments in Iran's oil industry appears to have hit a major snag. The result may be a blow to Iran's bid to compete for Caspian Sea oil, raising doubts about Tehran's reliance on Beijing. RFE/RL Correspondent Michael Lelyveld reports.

Boston, 22 June 2000 (RFE/RL) -- As Iranian President Mohammed Khatami begins a five-day visit to China today (on Thursday), a strategic oil deal between the two countries appears to have suffered a serious setback.

Last week, Iran's top official on Caspian affairs, Hossein Kazempour Ardebili, told the Petroleum Argus newsletter that China National Petroleum Corporation has withdrawn from a project to build a pipeline to handle Caspian oil swaps. No reason was given, but experts have cited lack of finances for CNPC's failure to pursue projects in the past.

The pipeline from Iran's Caspian port of Neka to a refinery near Tehran is crucial to its plans to compete against export routes backed by the United States and Russia. Iran wants to import 370,000 barrels of oil per day from other Caspian countries for its refining uses at home, while exporting an equal amount of its own crude through the Persian Gulf in exchange.

The scheme could save hundreds of miles in transit for Caspian exporters and hundreds of millions of dollars in pipeline construction costs. But Iran has spent more than two years in pursuing a series of deals to build the 336-kilometer line from Neka to Tehran.

All the deals have included China and CNPC, although an Iranian company failed to arrange financing for the first version of the scheme. The latest problem comes at a time when Iran would like to publicize the benefits of its relations with Beijing.

Iran's official press has been celebrating the president's trip to China this week. A 70-member Iranian trade delegation is also taking part in the visit, which could expand economic opportunities. On Tuesday, China's ambassador to Iran, Sun Bi Gan, called the Khatami mission "a historic event" and a turning point in relations. China has participated in some significant projects in Iran, including the Tehran Metro.

But nothing has been said in the official press about the swap project, which continues to be a disappointment. In early March, Kazempour Ardebili said that work on the pipeline would start in less than two months. Now three months later, Petroleum Argus said no work has begun, although Iran continues to promote the swap scheme as a more practical choice than a U.S.-backed pipeline from Baku to Turkey's port of Ceyhan.

The London-based industry publication called the withdrawal of China's state-owned oil company "a heavy blow for Iran's ambition to be a transit route for Caspian oil." The report said two other Chinese firms, Sinopec and Federal Asia, as well as Vitol of Switzerland, are still involved in the swap project, but construction of the pipeline may have to be undertaken by Iran itself.

Perhaps more troubling is that other aspects of the $360 million deal, which were previously reported as finalized, apparently were not. A final contract and a financing package have yet to be completed, and negotiations are said to be continuing on the expansion of port facilities at Neka, although a $103 million contract was signed in March.

The reasons for Iran's reliance on China for the crucial swap project remain a matter of speculation. Some experts believe that Iran initially sought the protection of a permanent member of the UN Security Council in the face of a U.S. sanctions threat for energy investment. Russia may have been ruled out as a partner because of its competition for Caspian oil with its route to the port of Novorossiysk.

China has also signed agreements to develop oilfields in Kazakhstan, which is a potential source of oil for swaps. But Iranian swap deals with Kazakhstan have languished for years, and China has also failed to pursue its projects in Kazakhstan.

In April, Iran created a stir by announcing that it was in talks to build a 1,500-kilometer line from Kazakhstan to the Persian Gulf. But officials claimed that the first stage of the plan had already started with construction of the swap line, and now, that does not seem to be the case.

Setbacks and delays in pipeline plans have become the rule rather than the exception for all Caspian competitors, although countries continue to publicize new schemes.

Last week, Turkmenistan President Saparmurat Niyazov appeared on state television, speaking about a scheduled visit by Chinese President Jiang Zemin next month and plans for yet another pipeline.

Niyazov said the two sides would talk about "investments in the 200-kilometer pipeline to carry oil across the Caspian to an Iranian sea port." No plans for a trans-Caspian pipeline to Iran have been previously known. So far, all the Caspian oil for swaps in Iran has moved by tanker and barge.