Bloomberg Reports Beijing’s Obfuscation Strategy Concerning Intensifying Sinopec-Iran/ILSA Controversy

(Washington, D.C.): On 19 January, the Bloomberg wire ran a news item that should be of more than passing interest to any American investors still contemplating the purchase of stock offered by China’s second-largest state-owned energy company known as Sinopec: In the face of mounting concerns about the company’s dealings with Sudan and Iran, Beijing is adopting a two-part obfuscation strategy aimed at diverting attention and warding off trouble from regulators and/or the Street.

As Bloomberg reports, the first element of this strategy has the Chinese claiming that an agreement between Sinopec and Iran is actually with China PetroChemical, Sinopec’s parent company, and therefore that it should not implicate “its listed unit [i.e., Sinopec].” This argument is a variation on a gambit Beijing employed last year to salvage another IPO by one of its energy “dinosaurs” — China National Petroleum Company — which hastily configured a subsidiary called PetroChina in order to obscure the parent’s controversial 40 percent equity stake in U.S.-sanctioned Greater Nile Petroleum Company of the Sudan.

As it happens, this party line is being contradicted by reports from Beijing’s China Daily that the “Sinopec Group, one of China’s largest oil companies, signed an agreement with National Iranian Oil Company….” The shell game becomes even more untenable in light of a report regarding the deal circulated on 11 January by Iran’s IRNA wire service:

Sinopec, the Chinese oil giant, and the National Iranian Oil Company (NIOC) signed an agreement to explore oil in Zavareh, Kashan, 205 kilometers south of Tehran. Li Gan Xung, a Sinopec official, told IRNA that the pertinent agreement was signed last week by the two companies.” (Emphasis added.)

Beijing’s second line of defense is that “engineering and technical skills” — rather than money — will be the medium of exchange and, therefore, the contract supposedly does not breach the $20 million investment threshold established under the Iran-Libya Sanctions Act (ILSA). Bloomberg notes: “As the agreement is essentially an exchange and involves little cash, it wouldn’t violate U.S. law, the company said.” (Interestingly, the “company official” referred to by Bloomberg is a “Sinopec” official, not a “China PetroChemical” representative.)

If the U.S. government permits such flim-flams as parent-to-subsidiary laterals and barter arrangements as a substitute for cash to circumvent ILSA (and, any other sanction regime), it can forget about having sanctions serve in the future as an effective policy alternative to generally ineffectual diplomatic demarches and draconian military responses.

(Bloomberg) — The U.S. government is investigating whether an agreement by China Petrochemical Co., the country’s top oil refiner, to develop oil projects in Iran violates a U.S. law designed to discourage non-U.S. companies from investing in the Iranian oil industry.

China Petrochemical, which is the main shareholder of New York and Hong Kong-listed China Petroleum & Chemical Corp., or Sinopec, signed an agreement with state-run National Iranian Oil Co. earlier this month to help explore an oilfield and upgrade two refineries in Iran.

“We have seen reports that Sinopec has signed an agreement to undertake refinery upgrades and work at Iran’s Neka port on the Caspian and an agreement on oil exploration,” said
U.S. State Department spokesman Bill Wanlund. “We continue to oppose investment in Iran’s petroleum sector. We’re continuing to assess the potential implications for possible violations of the Iran- Libya Sanctions Act.”

The U.S., which considers Iran a pariah state for its alleged role in sponsoring terrorism, has promised to impose sanctions on non-U.S. companies that invest more than $20 million a year in Iran under the Iran-Libya Sanctions Act of 1996.

China Petrochemical’s agreements are worth an estimated $150 million in total.
“The agreement was between the parent company and Iran, and doesn’t involve our listed company,” said Chen Ge, deputy director of Sinopec’s secretariat. The agreement was signed as “part of China Petrochemical’s normal business development.”

Still, analysts are concerned China’s Petrochemical’s activities in Iran could affect the performance of its listed unit. Sinopec, the No.2 oil company in China, has lost more than a quarter of its market value since it sold shares in October.

“Some investors or funds that have a moral mandate not to support” companies associated with countries likeSudan and Iran may be forced to sell their shares, said LawrenceLau, an analyst with SG Securities Corp in Hong Kong.

Expertise for Oil

Under the agreement, Sinopec will supply engineering and technical skills in exchange for a share of the crude oil produced from a 4,670 square kilometer oilfield 205 kilometers south of Tehran, said a Sinopec official. As the agreement is essentially an exchange and involves little cash, it wouldn’t violate U.S. law, the company said. In 1995, Conoco Inc., the fourth-largest U.S. oil company, had to annul a $550 million contract to develop two oil and gas fields offshore Iran because of a U.S. government order.

China Petrochemical is trying to find and produce more oil abroad to lower its dependence on supplies at home, where production is growing at a slower pace than demand.

Rival China National Petroleum Co., parent of PetroChina Co., has signed more than 20 contracts since 1997 with companies and governments in Peru, Sudan, Iraq, Venezuela and Kazakhstan to drill for an estimated 400 million tons of oil and gas reserves. About half the fields have since entered production.