(EnergyAsia, July 23 2014, Wednesday) — China has become the biggest buyer of Iranian crude oil with imports for the first half of this year surging 48% to a record 628,000 b/d compared with 425,000 b/d over the same period last year.

According to Chinese Customs data, China’s intake of Iranian crude oil reached their all-time high of around 800,000 b/d in April. As a result of this surge, Iran now meets around 10% of China’s crude oil imports and is its third-largest crude supplier after Saudi Arabia and Angola.

China’s increased buying has also enabled Iran to boost its crude oil sales to Asia to between 1.2 and 1.3 million b/d amid signs that the West has been easing back on its trade sanctions against Tehran. In January, the Obama administration made a vague announcement that it had suspended sanctions for China and several Asian countries so long as they maintained Iranian crude imports. Traders interpreted that as a signal for Iran’s customers to step up their imports.

Talks between Iran and six world powers over its controversial nuclear programme since last November have been extended for another four months after the two sides failed to reach agreement by the July 20 deadline. China is among the six that includes the US, Britain, France, Germany and Russia.

China is likely building up its strategic crude oil stockpile with Brent prices hovering between US$100 and US$110 a barrel for most of 2014 amid the worsening geopolitical situation in oil-rich parts of the Middle East and North Africa and the confrontation between Russia and the West over Ukraine.

Iran accounted for China’s record 6.81 million b/d crude oil imports in April that the International Energy Agency (IEA) observed was “not matched by commensurate rises in demand or crude (refinery) runs. If confirmed, the data imply an unprecedented crude stock build of 1.4 million b/d for April alone.”

“This has fuelled reports that China might have begun filling a recently completed expansion of its strategic petroleum reserve facilities. While that would benefit energy security not just in China but globally, crude imports of that scale might also support oil markets and keep commercial stocks from rising further elsewhere,” said the agency.

It cited media reports of rising traffic through some of China’s major ports located near its new strategic stockpile terminal in Tianjin and Huangdao.

Iran courting foreign investors
Meanwhile, Iran is determined to make the most of its window of opportunity by offering improved fiscal terms to attract new investments into its upstream oil and gas industry, said consultant GlobalData.

Iran’s oil sector has struggled to receive foreign investment over the last decade and badly needs to bring in companies with the latest technology to reverse production declines, said Will Scargill, GlobalData’s Upstream Fiscal Analyst.

He said Iran’s Oil Ministry has developed a petroleum contract to replace its previous buyback model in preparation to attract investment flows if and when sanctions are lifted.

“This change seems to be an improvement from an investor perspective and has already attracted interest from international oil companies, such as BP, Eni, Total, Gazprom, CNPC and Petronas,” he said.

“Based on recent reports, this new model will offer a share of output based on oil prices and associated risk, instead of cash repayment. While Iran would retain ownership of reserves, this should allow companies to book production entitlement as reserves in financial reports. This would be similar to the production sharing agreements (PSAs) offered in several countries in the region.”

However, the contract’s effectiveness in luring investors will ultimately depend on details thatare expected to be released later in the year.

If the right model is offered, Mr Scargill believes Iran could well attract international interest as it sits on proven reserves of 360 billion barrels of oil equivalent.

If the structure is similar to that of a conventional PSA, it’s likely that the contractor’s production share would vary according to profitability through an R-factor mechanism. This model would not cap the rate of return as the buyback contract did, making it more attractive to investors,” he said. The link between the contractor’s share of output and oil prices will prove another important feature of the contract.

“If the mechanism linking payment to prices adjusts the resultant production allocations in exact proportion to the prevailing price, the new model would in many ways be similar to service contracts, which pay cash fees,” he said.

“The payment value would not vary according to price, therefore providing a more stable contract for investors as no upside or downside price risk would be involved.”