China National Petroleum Corp pulls out of South Pars gas project in Iran

Analysts unsure of the primary reason for CNPC deciding to exit the project

CHINA National Petroleum Corp (CNPC) has officially pulled out of the South Pars (SP) gas project in Iran, leaving Iran to develop the vast gas field on its own.

Analysts are unsure of the primary reason for CNPC deciding to exit. China has been involved in long drawn out negotiations with the US over a trade deal, and given President Donald Trump’s antipathy towards Iran, might feel that involvement in SP is an obstacle to further progress.

It is also possible that, having signed up as junior partner on SP, alongside French oil major Total, CNPC did not feel that it had the resources at present to take on the lead role. Another possibility is that, with a war between the US and Iran still a possibility, China felt that the project was simply too risky.  

But regardless of the reason, with the project stalled for two years, Iran has been irritated by waiting for a decision, and Iranian oil minister Bijan Zangeneh said publicly in July that Iran would not tolerate any more foot dragging.

Iran was keen to bring in foreign capital to help boost production, as well as new technology developed by Total and CNPC. But last week Zangeneh said that Iran has the capabilites to develop SP phase 11 alone, just has it has done on earlier phases.

According to Iranian media, Mapna Group, an Iranian energy construction and engineering company, is working on a pressure boost platform that Total was originally to have provided. The plan is for the first jacket to be installed at phase 11 of the SP by March 2020.

Iran signed the deal with Total and CNPC two years ago, in a friendlier environment in the wake of the 2015 deal on controls over nuclear enrichment, known as the Joint Comprehensive Plan of Action.

According to an agreement signed in July 2017 the US$4.8 billion project was originally to be developed by a consortium led by Total, which was the operator with a 50.1% stake, CNPC with 30% and Petropars with 19.9%.

However, Total pulled out of the project, having decided that failure to comply with unilateral sanctions imposed on Iran by the US (which pulled out of the nuclear deal) would create too many difficulties in its global operations. Total is heavily involved in the US LNG industry, and said that it cannot afford to be exposed to any secondary sanctions, which might include the loss of financing in dollars by US banks for its worldwide operations, the loss of its US shareholders, or the inability to continue its US operations.

On May 16 2018, Total announced that it would not be in a position to continue the project in Iran and would have to unwind all related operations unless the company was granted a specific project waiver by the US authorities with the support of the French and European authorities - something which did not happen.

CNPC was left with 80% of the project, also taking on the leading role as operator. It did however put its investment on hold pending a final decision. SP11 was planned to be developed in two phases, with the first stage estimated to cost roughly US$2 billion.

SP is the world’s largest gas field. Around one third of the total reserves lie in Iranian territorial waters, with two thirds belonging to Qatar.

Total and CNPC continue to work closely together on other projects. They each have a direct 10% interest in the Arctic LNG 2 project in Russia, alongside Novatek (60%), CNOOC (10%), and a Mitsui-Jogmec consortium, Japan Arctic LNG (10%). Total also owns an 11.6% indirect participation in the project through its 19.4% stake in Novatek. Arctic LNG is expected to export its first LNG cargo by 2023.

The Yamal LNG project in Russia, in which Total and CNPC each hold a 20% stake, is already fully operational.

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