Iran announced Tuesday that it was cancelling a $2.5 billion contract with China National Petroleum Corp. (CNPC), citing the company's failure to fulfil its obligations.
The first phase of the deal was for CNPC to drill 185 wells at the giant South Azadegan field, which straddles the Iran-Iraq border.
But the oil ministry said on its website that only seven wells had been drilled so far under the contract, which was signed in late 2009.
"Due to non-compliance by the Chinese company CNPC, the termination of the contract will be issued," said Rokneddin Javadi, managing director of the National Iranian Oil Company (NIOC).
China has become a bigger player in the Iranian oil market since Western governments imposed sanctions on Tehran as punishment for its controversial nuclear programme.
Under the South Azadegan agreement, CNPC was to target production of 600,000 barrels per day.
However, Javadi said that one month after a 90-day ultimatum was issued in mid-February, the Chinese company had taken no action, leading to cancellation of the contract.
Under a separate $1.76 billion agreement signed in January 2009, CNPC and the NIOC are developing the North Azadegan field, aiming to produce 75,000 barrels per day.
The Azadegan field is one of the world's biggest with reserves of about 42 billion barrels.
Another Chinese oil giant, Sinopec, is developing the Yadavaran field, which neighbours Azadegan.