LONDON, Dec 20, 2006 (Dow Jones Newswires)

The Iranian government and China's biggest offshore oil producer, CNOOC Ltd. (0883.HK), have signed a $16-billion natural gas deal, Iranian news agency Mehr reported Wednesday.

Mehr, citing Chinese news agency Xinhua, said the deal would cover the development of Iran's northern Pars gas field and the construction of liquefied natural gas facilities which will export gas to China.

An Iranian Oil Ministry official told Dow Jones Newswires he believed the deal was a memorandum of understanding but had no additional details.

However, an Iranian oil official told Dow Jones Newswires that the agreement is a concrete deal.

The announcement comes amid an aggressive push by China to tap Iran's giant natural gas reserves, the second biggest in the world after Russia, to fuel power plants and other industrial projects.

North Pars is estimated to have some 48 trillion cubic feet of gas, according to the U.S. Energy Information Administration.

North Pars is Iran's second biggest gas project after the far bigger South Pars offshore field.

The Iranian oil official said that of the $16 billion cost of the development, $5 billion will be spent on the upstream and the balance on the downstream development of the field. The development will be made over an eight-year time span.

The agreement between Iran and CNOOC comes after the Islamic nation signed a $100 billion, 25-year contract with China's Sinopec for the production and export of LNG in late-2004.

That deal envisions potential LNG exports of 1.3 billion cubic a day and the development of Iran's Yadavaran oilfield.

Iran currently has no LNG facilities and their development in the country has been hobbled by U.S. sanctions slapped on Iran several years ago. Most LNG plants globally use processes developed by U.S. companies.

South Pars is believed to contain at least 280 trillion cubic feet and over 17 billion barrels of liquids reserves. Sales from South Pars are currently expected to earn Iran around $11 billion a year over the next three decades, according to Iranian oil ministry data cited by the U.S. Energy Information Administration.

Iran has been a net gas importer due to lagging investment caused by U.S. sanctions that has slowed development of its gas resources. The country is expected to become a net exporter by 2010, according to the International Energy Agency.

However, one Iranian analyst based in London said: "This announcement is highly political as it follows the anti-Iranian sentiment by the U.K. government towards Iran in recent days."

He said the Iranian government wants to show the world that despite western pressure on countries not to invest in Iran, some companies are still prepared to work with the Islamic republic.

Tuesday, U.K. Prime Minister Tony Blair described Iran as a "strategic threat" within the Middle East.

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