China Petrochemical Development Corp. : Iceland Signals Deeper Ties with China

Iceland's foreign minister signaled deeper cooperation with China on commerce and offshore exploration following the signing of the first free-trade pact between the Chinese and a European country. Ossur Skarphedinsson, speaking during an interview with The Wall Street Journal Monday, said the two nations are in advanced talks to cooperate on a study of offshore oil exploration in Iceland's northeast coastal waters. The region, known as the Dreki area, potentially holds vast crude-oil reserves and Icelandic officials have already granted permission to Norwegian and U.K. companies to explore some of the territory. Mr. Skarphedinsson, who is part of a delegation this week to China to sign a landmark free-trade agreement, wouldn't name the Chinese and Icelandic oil companies involved in the advanced talks.

He said China Petrochemical Corp., known as Sinopec Group, was involved in preliminary talks as well. The free-trade agreement signed Monday between the small island nation and one of the world's biggest superpowers came after China's former premier, Wen Jiabao, visited Iceland last April, Mr. Skarphedinsson said. China originally demanded unrestricted movement of labor in certain areas, Mr. Skarphedinsson said, but Iceland refused and China eventually conceded. "The Chinese originally demanded temporary free movement of labor in certain areas, and we absolutely refused that and, in the end, that [Icelandic position] was granted," Mr. Skarphedinsson said.

Mr. Skarphedinsson said the China-Iceland free-trade agreement isn't necessarily a model for other European countries as China made that major concession. Iceland, meanwhile, was able to win its priority concession: the removal of tariffs in the fisheries and industries related to fisheries--Iceland's main exports. "Our first request always is abolish all tariffs on fish products," Mr. Skarphedinsson said. "They were reluctant to do that but they yielded in the end." Mr. Skarphedinsson said there were no other exemptions to the free-trade agreement.

He said the removal of tariffs on Iceland's fishing exports, which range from 8% to 12%, will give Icelandic exporters access to China's rising middle class, which has started consuming more-upscale food products such as cod. The free-trade agreement also opens up new kinds of exports to China such as carbon fiber, a material used in cars and airplanes, Mr. Skarphedinsson said. Iceland produces carbon fiber from a special type of lava rock and using its vast abundance of geothermal energy. "There was increasing interest by the Japanese and Americans to build [carbon fiber] factories in Iceland, but for export to China," he said. "But the tariffs were 17%. With the free-trade agreement, [the tariffs] have been abolished in one go, and we already have had enquiries from abroad about the possibility of setting up such production in Iceland to produce and export to China."

Mr. Skarphedinsson said China currently makes up a only small portion of Iceland's imports and exports, but that trade is ramping up quickly. Meanwhile, Iceland's Orka Energy Holding and Sinopec Group signed an agreement to expand their cooperation beyond a preliminary agreement signed last year. The new agreement was signed with China Development Bank, which will finance the expansion of geothermal projects in China and ramp them up by at least a factor of 10, Mr. Skarphedinsson said.

Finally, Mr. Skarphedinsson and China's trade minister, Gao Hucheng, discussed the possibility of China using a trans-polar passage that would pass near Iceland as a shipping lane. Iceland has been lobbying countries for years to use the passage, which has become more accessible as ice melts due to global warming. Iceland could be a potential hub for ships using the passage, which would bring jobs and require the construction of a new port, Mr. Skarphedinsson said. "People always thought this would only happen long into the future," Mr. Skarphedinsson. Although ships may be able to use the passage only four months a year in the summer, it may become fully open between 2040 and 2050 due to global warming, he said.

Mr. Skarphedinsson said Yang Huigeng, director of the Polar Research Institute of China, said three weeks ago in Iceland that China may begin to use the passage by 2020 and that it could reduce shipping times by as much as 40%.