China announced March 22 that implementation of a $100-billion agreement for China to buy liquefied natural gas (LNG) from Iran has been postponed until mid-2006 at the earliest. The wrench in the gears is not the wrangling for better prices, but rather the fact that Iran currently has no LNG liquefaction facilities. International players such as China and India are getting their feet in the door early with lucrative contracts for LNG, but it will be another five years minimum before their energy relationships with Iran are based on anything but oil -- and even that assumes a massive change in the way Iran does business.

China's oil company Sinopec signed a $100-billion deal in 2004 to buy 10 million metric tons of LNG from Iran per year for the next 25 years. In exchange, Sinopec would take a 51 percent stake in the Yadavaran oil field, which is estimated to hold reserves of 3 billion barrels and has the capacity to produce 300,000 barrels per day (bpd), roughly the equivalent of China's total oil imports from all of its current international assets combined. The agreement took advantage of the relatively low energy prices at the time, and China is reluctant to renegotiate this favorable position.

Unfortunately for China, Iran's best estimate to begin exporting LNG is from the Pars fields -- under the operation of Royal Dutch/Shell, Total and Repsol YPF -- in 2009, making the claim that delays will stretch "only" to mid-2006 rather impractical. Iran lacks the necessary technology to develop LNG liquefaction facilities and so must rely on foreign companies, such as those operating in the Pars field, to provide the expertise. Even this situation requires Iran's investment climate to become more favorable to the type of multibillion dollar investment necessary to secure an LNG facility -- and it requires an international climate in which the current nuclear tensions are no longer being felt.

The more immediate issue for China is the development of the Yadavaran field, with which Sinopec, India's Oil and Natural Gas Corp. and the National Iranian Oil Company (NIOC) are involved. Shell has also expressed interest in obtaining the NIOC's 20 percent share in the field.

China is the fourth-largest oil importer in the world, and the ability to replace nearly 10 percent of its 3.5 million bpd imports with oil from state-owned assets has significant strategic value. With China's energy needs growing and the prices of natural gas remaining high, it is unlikely that China will allow this deal to fall apart. Despite the lack of LNG infrastructure and price disputes, China will most likely find it beneficial to preserve the agreement simply because, if nothing else, it will provide an abundant source of crude oil for import.